13.2 Ratios

Explanation

Cash Ratio
A measure of the amount of cash available to offset current debt. A ratio below .5 may mean you are having cash flow problems, possibly because of a significant backlog in accounts receivable.

Quick Ratio
A measure of the amount of liquid assets available to offset current debt. A healthy enterprise will always keep this ratio at 1.0 or higher.

Current Ratio
A measure of the degree to which current assets cover current liabilities. A high ratio indicates a good probability the enterprise can retire current debts. A ratio of 2.0 or higher is a comfortable financial position.

Current Liabilities to Net Worth
A measure of the extent to which the enterprise is using creditor funds versus their own investment to finance the business. A ratio of .5 or higher may indicate inadequate owner investment or an extended accounts payable period. Care should be taken not to offend your vendors (creditors) to the extent it affects your ability to conduct day to day business.

Total Liabilities to Net Worth
A measure of the extent that the net worth of the enterprise can offset the liabilities. A ratio greater than 1.0 should be avoided, since it indicates the creditors have a greater stake in the business than the owners.

Fixed Assets to Net Worth
A measure of the extent of investment in non-liquid and often over valued fixed assets. A ratio of .75 or higher is usually undesirable as it indicates possible over-investment and causes a largge annual depreciation charge that will be deducted from the income statement.

Fixed Assets to Total Assets
A measure of the extent to which fixed assets are financed with owners equity (capital). A high ration of .5 or higher indicates an inefficient use of working capital which reduces the ability to carry accounts receivable and maintain inventory and usually meanas a low cash reserve. This will often limit your ability to respond to increased demand for your products or services.

Sample from CitiLoc, Inc.