Analyse the profit and loss statement

You will need information from your annual profit and loss statement to calculate the ratios

Profitability ratios

Profitability ratios measure the ability of the business to make a profit. Use profitability ratios to answer the question, "Is my business as profitable as it should be?" An increase in the ratios is viewed as a positive trend. The profitability ratios for analysing the profit and loss staement are:

• Gross profit margin ratio
• Net profit margin ratio
• Break even analysis

Analyse the balance sheet

You will need information from both your annual balance sheet and profit and loss statement to calculate the ratios.

Debt ratios

Debt ratios measure the ability of the business to repay long term debt. That is:

• Debt to equity ratio

Debt ratios indicate vulnerability of the business to risk and are often used by creditors to determine the ability of the business to repay loans.

Liquidity ratios

Liquidity ratios measure the capacity of the business to meet short term financial commitments as they become due.

• Current ratio
• Quick ratio

These ratios indicate a comparison of the proportions of current assets and short term liabilities.

Efficiency ratios

Efficiency ratios measure how well the business manages its assets. These ratios indicate how quickly a firm converts non-cash assets to cash assets.

• Accounts receivable turnover ratio
• Accounts payable turnover ratio
• Inventory turnover ratio

What's next…

• Do you understand your profit and loss statements?
• Is your balance sheet in order? 
• Need some tips to manage your cashflow?

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