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Business RatiosAside from profiles, there are also standard business ratios that people use to evaluate a specific business, regardless of its relationship to other businesses of the same kind. Gross margin, debt to equity, return on investment, and other ratios are widely used as general indicators of business performance or business health. After you've developed projections for sales, profits, cash, assets, liabilities, and capital, then you can generate many standard business ratios automatically. Business ratios are often misunderstood. They aren't magic. Appropriate results vary from industry to industry. For example, a large manufacturing plant is going to have enormous assets compared to a small consulting company. Generally, the most important insight gained from ratios is the change in a ratio over time, rather than the specific number at any given time. While we do explain the standard financial ratios used here, there are better explanations available in financial management textbooks. Experts will almost always agree on the importance of following changes in a ratio over time, and on the wide variations of standards depending on the type of business. Profitability RatiosProfitability Ratios
Most business plans include some standard business ratios.
Return on Equity or Return on Investment (ROI) is probably the most important of these ratios. A business is an investment and it should yield profits comparable to alternative investments, unless there is additional compensation (such as salaries for the owners). In theory, at least, if ROI is low, you should sell the business and put your investment money to better use. Return on Assets and the Net Profit Margin provide a good basis for comparison between your company and the rest of the industry. They are also good indicators of company performance from year to year.
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