Leverage Ratio
This Debt/Worth or Leverage Ratio indicates the extent to which the
business is reliant on debt financing (creditor money versus owner’s
equity):
Debt/Worth Ratio = Total Liabilities
—————–
Net Worth
Generally, the higher this ratio, the more risky a creditor will perceive
its exposure in your business, making it correspondingly harder to obtain
credit.
Income Statement Ratio Analysis
The following important State of Income Ratios measure profitability:
Gross Margin Ratio – This ratio is the percentage of sales dollars left after subtracting the
cost of goods sold from net sales. It measures the percentage of sales
dollars remaining (after obtaining or manufacturing the goods sold)
available to pay the overhead expenses of the company.
Comparison of your business ratios to those of similar businesses will
reveal the relative strengths or weaknesses in your business. The Gross
Margin Ratio is calculated as follows:
Gross Margin Ratio = Gross Profit
————
Net Sales
(Gross Profit = Net Sales – Cost of Goods Sold)
Net Profit Margin Ratio This ratio is the percentage of sales dollars left after subtracting the
Cost of Goods sold and all expenses, except income taxes. It provides a
good opportunity to compare your company’s “return on sales” with the
performance of other companies in your industry. It is calculated before
income tax because tax rates and tax liabilities vary from company to
company for a wide variety of reasons, making comparisons after taxes much
more difficult. The Net Profit Margin Ratio is calculated as follows:
Net Profit Margin Ratio = Net Profit Before Tax
———————
Net Sales
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