Understanding Key Financial Ratios for Businesses

Working Capital

Working Capital measures the capacity for payment in the ordinary course of business activity. It's calculated as: Current Assets (CA) - Current Liabilities (CL)

• CA > CL: Positive Working Capital. The business has the potential for investment. Working Capital should never exceed 10% of CA, as these are idle funds.
• CA < CL: Negative Working Capital. This may indicate a suspension of payments or insolvency. It usually signifies mismanagement in the negotiation of ordinary business activity, but it doesn't always mean a bad situation.

Acid Test

The Acid Test measures a company's capacity to meet all of its short-term debts. It's calculated as: (Current Liabilities - Treasury) / Available. This indicates immediate liquidity; positive is good, negative is not.

Profitability

Profitability measures the return on investment for partners. Results can be analyzed from two perspectives:

1. (Share Capital + Reserves +/- Profit) / Total Assets: Represents the investors' return on the company's total assets.
2. Share Capital / Profit: Represents the percentage return on investment with respect to the results of the company's ordinary activity.

Treasury Ratio

The Treasury Ratio measures the percentage of solvency and the company's capacity to pay overdue debts. The result should be close to unity (between 0.8 and 1.2). It's calculated as: Cash / Current Liabilities.

Liquidity Ratio

The Liquidity Ratio is calculated as: Current Assets / Current Liabilities. It considers:

• Convertible: Everything the company has that can be sold without affecting production capacity.
• Feasible: Overdue receivables.
• Available: Cash.

EBIT (Earnings Before Interest and Taxes)

EBIT represents the gross operating profit before interest and taxes. It's calculated as: Gross Profit - Operating Expenses +/- Interest.

Guarantee Ratio

The Guarantee Ratio is analyzed by third parties and allows them to know if the company can pay its debts. It's calculated as: Real Assets (excluding intangible assets and provisions) / Total Liabilities (Long-Term Debt + Current Liabilities).

Autonomy Ratio

The Autonomy Ratio measures the company's capacity to operate without needing third-party resources. It's calculated as: Net Worth / Total Liabilities.

Immobilization Ratio

The Immobilization Ratio indicates that fixed assets must be financed by equity and permanent capital (1 or less). It's calculated as: Non-Current Assets / (Net Worth + Non-Current Liabilities).

Indebtedness Ratio

The Indebtedness Ratio analyzes the overall debt of the company. Total liabilities should be as low as possible. It's calculated as: Total Liabilities / Net Worth.