Amy Oglesby and Kyle Wininger
      Harding Shymanski and Company, P.S.C.

During this challenging economic period, understanding the financial consequences of every decision is critical. Thus, analyzing financial statements has become of utmost importance for business managers as they seek to improve the financial position of their organization.

To assist in analyzing financial statements, many companies utilize financial ratios. Once calculated, these ratios can be used to identify strengths and weaknesses of your organization. They can also help managers by benchmarking your organization’s ratios against other companies within your industry. Here are five types of key ratios that can be utilized when analyzing financial statements:

1. EFFICIENCY RATIOS - Efficiency ratios are important in measuring how well a company is turning its inventory, sales, assets, accounts receivable and accounts payable. For instance, if a company is having trouble turning accounts receivable, efficiency ratios can be used to signal an increasing danger of liquidity if turnover begins to slide out of line with credit terms. Efficiency ratios also measure the ability of a company to meet its short term and long term obligations.

2. CAPITAL STRUCTURE RATIOS - Capital structure ratios analyze the relationship between a company’s debt load, its fixed asset base and net worth. Essentially, they provide an indication of the long-term solvency of the company and the amount of protection available to creditors. For instance, a high level of debt can indicate that the company has a lot of risk because it must meet principal and interest on its obligations.

3. LIQUIDITY RATIOS - Liquidity is a company’s ability to meet its short-term financial obligations. Liquidity ratios are essential as they measure how well a company can pay debt without selling inventory. Creditors also pay particular attention to liquidity ratios since they can reflect an organization’s ability to make timely principal and interest payments.

4. OPERATING RATIOS - Operating ratios analyze an organization’s performance and its effectiveness in utilizing the resources available. For instance, operating ratios can assist in providing analysis to management regarding key operating expenses which may yield the largest increase in savings such as labor and utilities.

5. PROFITABILITY RATIOS - Profitability ratios are useful in expressing the company’s effectiveness by measuring return from sales and investments. For instance, fluctuations in profitability ratios could be caused by a decrease by an industry price war or even poor management of costs.

Financial ratios generally hold no meaning to an organization unless they are benchmarked against something else, like past performance or industry statistics. Trade associations are often a good resource for companies as they will provide benchmarks for particular industries. Ratio analysis and benchmarking can be a valuable tool to help your organization in identifying key areas that need to be evaluated and possibly improved on.

Free Offer! - To receive a free business ratio analysis tailored to your business, please contact Kyle Wininger at kwininger@hsccpa.com or Amy Oglesby at aoglesby@hsccpa.com. They can also be reached at 1-800-880-7800.

Amy Oglesby and Kyle Wininger are consultants at Harding, Shymanski & Company, P.S.C. - Certified Public Accountants and Consultants, an independent member of the RSM McGladrey Network. Harding, Shymanski & Company, P.S.C. provides accounting, tax and consulting services to clients from offices in Evansville, Indiana and Louisville, Kentucky and is one of the largest locally owned CPA firms in Indiana and Kentucky.