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Summary of 8 Financial Ratios and Business Administration at SMEs

8 financial and business management ratios that SMEs should know

ฺฺBusiness financial information Often contains a large number of sub-data. Going down one by one can be confusing and can easily lead to mis-analysis.

“Financial Ratios” is a tool that helps businesses. To understand the financial situation easily and quickly. There are many types of financial ratios. However, there are 8 financial ratios that are often used in consideration, as will be discussed below.

– Current ratio (Current Ratio) is caused by dividing the current assets of the company with the current liabilities of the company. which, if explained simply It is used to measure a company’s ability to pay off its short-term debt. If the value is higher than 1, the company has more current assets than current liabilities. This means that the company has high liquidity. No short-term debt repayment problems But if the value is lower than 1, it may mean that the company has liquidity problems, etc.

The solution may be to reduce the investment rate in long-term assets. Hold more current assets or reduce the capital increase by using short-term loan sources to reduce current liabilities

– Debt to Equity Ratio (D/E) is to divide the company’s debts by the total shareholders’ equity. This ratio is the ratio used to measure a company’s debt level from its total assets. In general business, this ratio should not be higher than 2. In other words, the total debt the company has. It should not be higher than the company’s own basic capital. This value is important in the valuation point of any financial institution or investor. Because businesses with ever-growing assets don’t always mean quality growth. Because the company may borrow both short-term and long-term to expand assets indefinitely, if the company does this. What is reflected is that the company’s D/E will continue to rise. Over time, in other words, companies whose D/E values ​​keep growing. business will grow income will be more But there are signs of business danger. Because the business is growing by expanding debt.

– The rate of return on assets or Return on Asset (ROA) is caused by dividing the net income of the company by the total assets of the company. This ratio is used to measure how efficient a company is in monetizing its assets, and it is clear that the higher this value, the better. And comparable companies must have the same level of business growth because the ROA values ​​of each business are very different and at the same time, the ROA values ​​of companies at different stages of growth are also different.

– Return on Equity (ROE) is a result of dividing the company’s net income with the shareholders’ equity. It is a ratio used to measure the break-even of the capital that shareholders put into the business. Of course, the higher the value, the better. because it means that the business Take the capital that the business partner has invested. to be used effectively

– Gross Profit Margin and Net Profit Margin

The gross profit margin is the gross profit divided by the sales and multiplied by 100 (the value is %).

The net profit margin is the net profit divided by the sales and multiplied by 100.

These two values ​​have similar functions: they are used to analyze the profit margin of a business. The larger the number, the better. But both of these ratios can also be indicative of a dangerous signal. For example, if Company A is earning more and more, it is making more and more profits, but gross margins are slowly declining, an indication that the business may have a higher margin. some problem due to lower profit margins The management had to go down to look at the details of the financial statements to see what happened. This may be due to the fact that cost of sales is expanding faster than sales. The management must consider adjusting the details of the cost of sales accordingly. to prevent it from growing faster than sales, etc.

It can be seen that financial ratio analysis is very useful. Both from the perspective of executives, investors and external financial institutions to provide loans or loans. It is what allows us to quickly see the picture of the business in the way we want, at the same time it helps in detecting any irregularities. that we can’t see if we don’t look at it as a ratio, for example if we look at the financial statements at a glance We may see sales grow, profits grow, but let’s look carefully through making a financial ratio. We may find that profit margins have declined. Then come take a look We may find that D/E increases. This may lead us to think that something is wrong. If you explore, you may find that the company has borrowed money for promotional purposes. The result is increased sales. but the profit margin has declined This, of course, is a fundamental indicator that the company’s growth is inefficient, for example.