Reasons to Learn Financial Ratios from a Business Coach

Whether you're a business owner or an investor, there are many reasons to learn financial ratios. Whether you're looking for a better understanding of the numbers that matter or if you're a major in finance preparing for your next big career move, learning these numbers can help you make better financial decisions.

P/E Ratio

Whether you're a business leader, investor, or just someone interested in a company's financials, it's essential to know how to use financial ratios. These metrics help you monitor a company's performance over time and make effective decisions. For example, the price-to-earnings ratio (P/E) measures how much a share of stock is worth. This valuation tool is most often used to compare stock prices of similar companies. However, you can also use it to assess a company's future performance. Generally, a higher P/E ratio indicates that investors think the company will have better earnings in the future.

A low P/E ratio can indicate that a stock is undervalued, which means it's an ideal candidate for value investing. However, a high P/E ratio can signal that a stock is expensive. It can indicate that investors are anticipating higher future returns, or it may mean that a company is in a cyclical period and is yet to be profitable.

Return on Equity

Whether a first-timer or a veteran of the financial world, you probably have heard of the return on equity. It is a measure of the efficiency of a company's use of its equity, which is measured by the size of its balance sheet. Many types of businesses exist, but a few have an exceptionally high or low ROE.

A return on assets is a bit more complicated. It measures the efficiency of a company's use of its assets to produce a profit. It is calculated by taking the sum of the total assets in the company and dividing it by two. The ratio can be used to make a more comprehensive evaluation of the company's performance.

Return on investment is another metric you should look into. The ratio is a measure of the financial return made by shareholders, which you can improve by increasing the size of the company's investment portfolio or buying back some of its stock.

Quick Ratio

Knowing the quick financial ratios of your business can help you determine whether or not you are on the right track. These ratios may seem complicated, but they can be surprisingly easy to understand. Using them can help you make informed business decisions and pinpoint areas of improvement.

The Quick Ratio is a calculation that compares a company's current assets to its current liabilities. This ratio can help determine how well your business can convert its assets to cash. If your company's current assets are relatively low, consider taking some action to increase your cash flow. However, you should also be concerned if your quick ratio is less than one-to-one. It may mean that you are holding on to cash that isn't earning you any money.

Debt-To-Total-Assets Ratio

Using a debt-to-total-assets ratio to make decisions on investments can be an excellent way to measure the company's financial strength. Lenders and investors also use it to determine whether to extend additional loans. However, it's also essential to understand the risk associated with high leverage. A high debt-to-total asset ratio can be a sign of financial trouble and may eventually lead to bankruptcy.

Typically, a lower debt-to-total asset ratio indicates less risk. However, it's also essential to consider the trend of a company's financial risk profile over time. For example, if the ratio has been trending up, this could be a warning that the company isn't prepared to pay down its debt.

If the company's ratio has been trending down, this can signify that it has more flexibility and will be able to pay down its debt. On the other hand, a company that has high debt may find it difficult to remain afloat in a recession.

Profit Margin

Keeping track of a company's profitability is not to be taken lightly. The cost of goods sold vs the cost of labour is a constant battle, and the cost of raw materials is also a matter of keen observation. A reasonable profit margin will keep the cash flow flowing and allow a company to build for the future. Conversely, a lousy margin will spell disaster.

A good business coach can help determine whether your company is raking in cash. If you are looking for the next big thing, you need to take the time to understand how to do the numbers in your favour. If you don't, you'll find yourself at the mercy of the fads. Getting a good handle on the finer points of finance is the best way to get a jump start on the competition.