Ratios generally reveal the strengths and weakness of your business at the end of each accounting period, annually as well as quarterly. Ratios are nothing but one accounting number divided by another, whereby these numbers are plucked from your balance sheets and Income Expense statements. They can be taken as useful way of looking at and measuring about your startup vision and mission tracker. For your ease to understand these complex number games, we have grouped these ratios into 5 categories :
1 )Solvency Ratios [ Liquidity Ratios ] a) Current Ratio = Current Assets / Current Liabilities Current Ratio explains how good is the cash inflow of your startup in a short term would cover your cash outflows. b) Quick Ratio = [ Current Assets – Stock / Current Liabilities ] Again this ratio would show how well your liquid assets [ excluding the inventory ] would suffice to meet your current / short term liabilities.
2) Leverage Ratios [ Debt Ratios ] These ratios would tell you how extensively your Startup used Debt , instead of Equity as a source of funding a) Debt Ratio = Total Debt / Total Assets.This ratio would let you know how much assets your startup owns by the funding obtained and not by your own capital / equity. b) Debt – Equity Ratio = Total Debt / Total Equity A Debt –Equity ratio of 2 means that you borrowed Two Rupees for every One Rupee of Equity you have injected in your Startup.
c) Times Interest Earned Ratio = Earnings / Interest Payments: It explains how well your earnings are covering your interest payments which your startup is bound to pay to their lenders.
d) Fixed Charge Coverage Ratio = Earnings / Fixed Charges This ratio depicts how far your earnings can cover fixed expenses such as Rent, Insurance , Salary and other fixed overheads.
3) Profitability Ratios : a) Profit Margin on sales ratio = Net Profit / Sales. Higher this ratio is better for your startup as this ratio shows what percent of sales is your Net Profit. b) Return on Assets = Net Profit / Total Assets. This tell us how much Net profit a Rupee of Total Assets generate. If the Return on Asset is 10% , it means each Rupee of Asset has generated 10% of Net Profit. c) Return on Equity = Net Profit / Total Equity. This ratio tell us how much Net Profit accrues back to each Rupee of Equity. For example , if the ratio is 18% , then Investors would receive Rs.1.18 back from the startup for Each Rupee they have invested. 4) Valuation Ratios : These ratios measure how valuable the firm is to outside investors. a) Earnings Per Share = Net Profit / Number of Shares Outstanding. The EPS ratio reveals how much earning each share can claim . For example , an EPS of Rs.2 means that each share has a claim on Rs. 2 of your startup earnings. In this case, the startup can pay Re.1 of dividend for each share and retain the other Re.1 of the investor’s earnings for future expansion. b) Price Earning Ratio = Market Price Per Share / Earnings Per Share. The P/E Ratio shows how much investors are willing to pay for a Re.1 claim on the startup earnings. If the share is traded at Rs.60 and has an EPS of Rs.3 , then its P/E ratio is 20. c) Book Value = Equity / Shares Outstanding. It is a simple measure of each investor’s claim on the entire startup. d) Market – to-Book Ratio = Market Price Per Share / Book Value per share. It indicates how many times the market price of the stock exceeds its book value. 5) Asset Management Ratios. These ratios measures how actively your Startup is using its Assets. a) Inventory Turnover Ratio = Sales / Inventory. It measures how many times the startup has sold out or turned over its inventory. One can apply this ratio to a specific product line in order to see what’s selling the best. b) Total Assets Turnover Ratio = Sales / Total Assets It measures how many times the firm has sold or turned over its total assets.