While analyzing the balance sheet and the income statement, sales and operating ratios should
be calculated in order to point out areas requiring further study. Ratios provide insight into
profitability, liquidity, efficiency, and leverage ability.
Profit ratios such as gross margin and EBITDA margin are the most straightforward and
demonstrate the amount of income being generated from sales.
Liquidity ratios such as the current ratio and quick ratio give insight into whether or not the
company is able to operate efficiently with the ability to meet its obligations and turn its
products and services into cash.
Efficiency ratios such as inventory accounts receivables, and accounts payables demonstrate
how long does it take a company to sell inventory, collect receivables and pay payables.
The company’s existing borrowing and equity ratios are less relevant as your debt structure will
likely be different from the seller’s. You can, however, calculate your assumed leverage and
equity ratios to see what the picture will look like for you once you have purchased the
company.
A ratio by itself may not tell you much on its own, you must compare them to prior years and
also to industry standards to get the real picture of a business position. The significance of each ratio, the methods for calculating them, and industry averages are available through publications such as Dun & Bradstreet and Robert Morris Associates. Look for
trends in the ratios over the past 3 to 5 years.
Need more information? Call us at 204-478-7266, ext. 110. or click
https://www.bealbusinessbrokers.ca/buying-a-business/ to download our free e-book on
buying a business.