Inside Public Accounting – Financial Ratios
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Profit Margin, Turnovers, Debt, and Financial Ratios

October 2, 2013

Every business creates a basic set of financial statements to in order to perform financial ratio analysis evaluation on at the end of the year. This basic set of financial statements includes a balance sheet, income statement, statement of retained earnings, and cash flow statement. At the end of these companies’ fiscal years, they can use these statements to prepare tax returns or distribute them to investors and creditors.

Investors and creditors generally look what the accounts receivable turnover ratio is or AR Ratio to judge how efficiently a firm can collect the money customers owe for inventory purchases. In contrast, the debt ratio analysis is a solvency ratio that compares a firm’s total liabilities to total assets. This ratio shows how aggressive a business is with borrowing money from creditors to pay for plant expansions and fund operations. The gross margin ratio analysis is a profitability measurement that calculates how well a company can purchase inventory and sell it for a profit.


Financial Ratios Explained
Both of these financial ratios (found here illustrate how effectively and efficiently management can run its business. The debt ratio formula helps management calculate a company’s total debt as a percentage of total assets. This shows how leveraged the company is. In other words, companies can use debt to expand their operations or just to maintain their operations. Firms with higher levels of debt are considered to be more risky for creditor and investors.

Gross margin examples and explanations, on the other hand, calculates how profitable a business can sell its inventory. If a company can purchase goods and other merchandise at lower cost levels, it can turn around and sell it for a higher profit. GM is calculated by subtracting cost of goods sold from the gross sales. Even if firms are efficient with their inventory, they still need to collect cash from their sales. Account receivable turnover  measures how effective receivables are being collected. This is an important concept because sales don’t mean anything if the cash can’t be collected.