Welcome to part 67 of my e book Recession Proof Your Business, Recession Proof Your Life: Learning how to use ratio’s to improve your business and help it to grow,
Financial Ratio Analysis

Assessing the Health of Your Business

Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things.
First we will start with an overall picture of what ratio analysis is, who uses it and the ratios they need to be able to use it. All that’s left to do then is to use the ratios; and we will do that step- by-step, one by one.
WHAT DO WE WANT RATIO ANALYSIS TO TELL US?
The key question in ratio analysis isn’t only to get the right answer: for example, to be able to say that a business’s profit is 10% of turnover. We have to start working on ratio analysis with the following question in our heads:
What are we trying to find out?
We can use ratio analysis to try to tell us whether the business
1. is profitable
2. has enough money to pay its bills
3. could be paying its employees higher wages
4. is paying its share of tax
5. is using its assets efficiently
6. has a gearing problem
7. is a candidate for being bought by another company or investor
and more, once we have decided what we want to know then we can decide which ratios we need to use to answer the question or solve the problem facing us.
Till next time
Regards
Michael