📊 Important Financial Ratios (Made Simple)
1. Gross Profit Margin
What it shows:
How much profit you make after covering the cost of your products/services.
Formula:
Gross Profit ÷ Sales × 100
Why it matters:
It tells you if you’re pricing your products correctly and managing your direct costs well.
2. Net Profit Margin
What it shows:
How much of your total sales actually turns into profit after all expenses.
Formula:
Net Profit ÷ Sales × 100
Why it matters:
It shows the overall profitability of the business.
3. Current Ratio
What it shows:
Whether you can pay your short-term bills (within a year).
Formula:
Current Assets ÷ Current Liabilities
Why it matters:
A ratio above 1 means your business is financially healthy in the short term.
4. Debt-to-Equity Ratio
What it shows:
How much of the business is funded by debt vs. your own money (equity).
Formula:
Total Debt ÷ Total Equity
Why it matters:
Helps you understand your financial risk. High debt can be risky.
5. Return on Investment (ROI)
What it shows:
How much profit you earn from the money you’ve invested.
Formula:
Net Profit ÷ Total Investment × 100
Why it matters:
Shows if your investments are paying off.
6. Accounts Receivable Days
What it shows:
How long it takes your customers to pay you.
Formula:
(Accounts Receivable ÷ Sales) × 365
Why it matters:
The longer it takes to get paid, the more it affects your cash flow.
7. Inventory Turnover
What it shows:
How many times you sell and replace your stock during a period.
Formula:
Cost of Goods Sold ÷ Average Inventory
Why it matters:
Low turnover means slow sales or too much stock; high turnover is usually better.
8. Break-even Point
What it shows:
The sales amount you need to cover all your costs — no profit, no loss.
Why it matters:
Helps you understand how much you need to sell just to survive.
✅ How Prosperity Accounting and Bookkeeping Solutions Can Help
We help business owners track and understand these key numbers so you can:
- Make better business decisions
- Stay financially healthy
- Grow with confidence
📈 Let us simplify the numbers so you can focus on running your business.
