They are the pressure gauges that should be read at least once a year. Financial ratios do not have to be difficult. While there are dozens that are used by financial analysts there are six that can be used by every small business owner. These six ratios are often used by bankers to evaluate the performance at a potential borrower. A word of caution.
Ratios are most effective when they are used to highlight trends.
They should be compared with each other over several years. The absolute number is not as important as the direction of the trend. Seasonal sales volume changes and different inventory levels can distort the ratios if different financial reporting periods are compared. Current Ratio - This is a measure of a company's ability to pay current liabilities when due. Since working capital is current assets minus current liabilities, this classic ratio is calculated by dividing current assets by current liabilities.