The 7 most important personal finance ratios

Your personal financial statements, specifically net worth and the monthly budget, use your financial data to describe an individual’s or household’s financial condition. With some number-crunching, you can calculate personal finance ratios as tools designed to evaluate your financial strength and position. 1.

Like the price to earnings ratio, the current ratio is one of the most famous of all financial ratios. It serves as a test of a company’s financial strength and relative efficiency. For instance, you can tell if a company has too much, or too little, cash on hand.

By tracking your personal financial statements, you can simply calculate all of the above ratios automatically. I strongly suggest that you monitor both your personal finance ratios AND your personal financial statements on a monthly basis. If not, definitely refresh your personal financial ratio analysis every quarter.

The 7 most important personal finance ratios

Financial planning components

See below image for the Financial planning components diagram. 8 Components of a Good Financial Plan. 1 1. Financial goals. You can’t make a plan until you know what you want to accomplish with your money—so whether you’re creating it yourself or working … 2 2. Net worth statement. 3 3. Budget and cash flow planning. 4 4. Debt management plan. 5 5. Retirement plan. More items

While there are many ways to go about developing a plan—do it yourself, use a robo-advisor, work with a financial planner, or a combination thereof—Schwab has identified the eight critical components every plan should include, regardless of the method used to create it. 1. Financial goals

There are more than two key financial considerations in preparing a financial plan. Financial plans are necessary for every company; whether it’s an already established firm or a new startup. Financial plans are important as they have all the outflows and inflows involved in operating the organization clearly listed out.

Financial planning components

Steps in financial planning process

See below image for the Steps in financial planning process diagram. 7 Steps: The Financial Planning Process Monitoring Progress and Updating Implementing the Financial Planning Recommendation(s) Understanding the Client’s Personal and Financial Circumstances 1 2 3 4 5 6 7Identifying and Selecting Goals Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action

Successful plans will also require a significant degree of financial planning. Following a 5 step financial planning process should significantly increase the potential of developing a winning financial plan. The goals and objectives will be the guide to the financial plan and should provide a roadmap for your financial future.

The financial planning process is important to understand as it can help you create efficient action items to better your money. This series of steps will be your go-to strategy that outlines how to budget, where to invest, and what other assets can help you achieve your financial goals.

Steps in financial planning process

Financial planning process

See below image for the Financial planning process diagram. The steps in the financial planning process are as follows: Establish and define the relationship with the client. The financial planning professional informs the client about the financial planning process, the services the financial planning professional offers, and the financial planning professional’s competencies and experience.

A financial plan is a personal document created to help assess your current financial situation, create various money goals, and help you make better financial decisions going forward. You can create this plan on your own or work with a certified financial planner. And according to the CFB Board, the financial planning process is defined as:

The financial planning process is important to understand as it can help you create efficient action items to better your money. This series of steps will be your go-to strategy that outlines how to budget, where to invest, and what other assets can help you achieve your financial goals.

Financial planning process

Accounting ratios definition and meaning

Accounting ratios, also known as financial ratios, are used to measure the efficiency and profitability of a company based on its financial reports. They provide a way of expressing the relationship between one accounting data point to another, and are the basis of ratio analysis.

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet

There are four types of Accounting Ratios with formulas This first type of accounting ratio formula is used for ascertaining the liquidity position of the company. It is used for determining the paying capacity of the company towards its short term liabilities. A high liquidity ratio indicates that the cash position of the company is good.

Accounting ratios definition and meaning

What is a financial ratio the complete beginner

A financial ratio is a metric usually given by two values taken from a company’s financial statements that compared give five main types of insights for an organization. Things such as liquidity, profitability, solvency, efficiency, and valuation are assessed via financial ratios.

It’s one of the most important financial ratios you can learn. Interest Coverage Ratio The interest coverage ratio is an important financial ratio for firms that use a lot of debt. It lets you know how much money is available to cover all of the interest expense a company incurs on the money it owes each year.

Financial Analysis Example For Complete Beginners 1 Step-One: financial ratios set-up & two-year comparison. In this step, we are going to select a set of ratios that will guide us toward our analysis. … 2 Step number two: DuPont analysis. … 3 Step three: select comparable set-up and comparative analysis completion. …

What is a financial ratio the complete beginners scaled

Profitability ratio analysis example

Calculation Examples of Profitability Ratios Analysis. 1 #1 – Gross profit. = Net sales – Cost of goods sold. So form the above calculation, gross profit will be: 2 #2 – Net profit = $31,000. 3 #3 – EBITDA. = Net profit + Interest expense + Tax + Depreciation expense. So from the above calculation, EBITDA will be:

Net Profit Margin: When doing a simple profitability ratio analysis, the net profit margin is the most often margin ratio used. The net profit margin shows how much of each sales dollar shows up as net income after all expenses are paid.

These ratios are normally included whether assessing and analyzing profitability ratios: Return on equity. In performance management, performance assessment, and/or investments analysis, we normally use some of theses ratio along with others ratios and non-financial indicators to measure and assess the performance, financial position of the entity.

Profitability ratio analysis example

Price to Earning Ratio Formula

Price to Earnings Ratio is calculated using the formula given below Price to Earnings Ratio = $40 per share / $4.00 per share Price to Earnings Ratio = 10.00x Therefore, the company’s stock is currently trading at a P/E ratio of 10.0x.

This ratio is also known as earnings multiple or price multiple. The formula for the P/E ratio is expressed as the share price or market value of the subject company divided by its earnings per share. Mathematically, it is represented as below,

Let’s take the example of Apple Inc. to Calculate PE Ratio Using Formula Annual Earnings per share for year ended Sept 30,2018 = $11.91 PE = 165.48/11.91 PE = 13.89x What is PE Ratio Formula? – Price to Earnings (PE) is one of the most popular ratios formulae that are being used by investors for valuing companies and taking investment decisions.

Price to Earning Ratio Formula

Key Financial Ratios

This key financial ratio shows whether a company has enough income to cover its debts and is often used to evaluate a company’s credit risk and debt capacity. Debt service coverage ratio is calculated by dividing net operating income by total debt service (i.e. the sum of its debt obligations, including lease payments).

Commonly used ratios in this classification include: Gross margin ratio. The formula is the gross margin, divided by sales. It is useful for evaluating the total profitability of a company’s products and services. Operating income ratio.

Financial Ratios are key indicators of the financial performance of the company and are usually derived from its three statements including income statement, balance sheet, and cash flows. These financial ratios help in analyzing the company’s profitability, liquidity, assumed risks as well as financial stability.

Key Financial Ratios

Inventory Turnover Ratio Diagram

Inventory Turnover Ratio = $97,000.00 / $36,500.00 Inventory Turnover Ratio = 2.66 As the inventory turnover ratio is greater than 1, it implies efficient management of inventory in the company.

You can calculate the inventory turnover ratio by dividing the inventory days ratio by 365 and flipping the ratio. In this example, inventory turnover ratio = 1 / (73/365) = 5. This means the company can sell and replace its stock of goods five times a year. Source: CFI financial modeling courses.

1 Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory 2 Inventory turnover ratio = $235,000 ÷ $22,500 3 Inventory turnover ratio = 10.44

Inventory Turnover Ratio Diagram