Table 1. Ratio analysis and their users
USER RATIO WHAT IT MEASURES WHAT IT TELL YOU
OWNERS
R e t u r n o n
i n v e s tme n t
(ROI)
Return on owners’ capital.
When compared with
r e t u r n o n a s s e t , i t
measures the extent to
which financial leverage is
being used for or against
the owner.
How well is this
company doing as
an investment?
R e t u r n o n
Asset (ROA)
How well assets have
b e e n e m p l o y e d b y
management.
H o w w e l l h a s
m a n a g e m e n t
employed company
assets? Does it pay
to borrow?
MANAGEMENT
N e t P r o fi t
Margin
Operating efficiency. The
ability to create sufficient
profits from operating
activities.
Are profits high
enough, given the
levels of sales?
A s s e t
Turnover
Relative efficiency in using
total resources to product
output.
How well are assets
b e i n g u s e d t o
g e n e r a t e s a l e s
revenue?
R e t u r n o n
Asset
Earning power on all
assets; ROA ratio broken
into its logical parts:
turnover and margin.
H o w w e l l h a s
m a n a g e m e n t
employed company
assets?
A v e r a g e
C o l l e c t i o n
Period
Liquidity of receivables in
terms of average number
of days receivables are
outstanding.
Are re c e i v abl e s
c o m i n g i n t o o
slowly?
I n v e n t o r y
Turnover
Liquidity of inventory; the
number of times it turns
over per year.
Is too much cash
t i e d u p i n
inventories?
Average Age
of Payables
Approximate length of time
a firm takes to pay its bills
for trade purchases.
How quickly does a
p r o s p e c t i v e
customer pay its
bills?
W o r k i n g
Capital
Short-term debt-paying
ability.
Does this customer
have sufficient cash
o r o t h e r l i q u i d
assets to cover its
s h o r t - t e r m
obligations?