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Business performance and financial measures

The profitability of a company influences its value and the amount of income it generates for its owners. Two financial indicators that measure the profitability of a company are the net profit and the return on assets. … The percentage of return on assets measures how efficiently the company is using its resources.

Profitability
The profitability of a company influences its value and the amount of income it generates for its owners. Two financial indicators that measure the profitability of a company are the net profit and the return on assets. The percentage of net profit is the amount of net profit divided by the amount of sales times 100. The percentage of return on assets is the amount of net profit divided by the total value of the assets of the company times 100. The percentage of net profit, or net profit margin, measures the ability of the company to generate surplus cash. The percentage of return on assets measures how efficiently the company is using its resources.
Liquidity
Even when a company generates a profit, it can go bankrupt if it has big expenses due in the short term and has no money to pay them. Liquidity ratios evaluate the liabilities a company faces in the current year and what assets it has to meet them. You can calculate the current ratio by dividing current assets, or assets you can convert to cash in the current year, by current liabilities. Current assets usually include inventory, but if you liquidate inventory, your business may suffer. The quick ratio is current assets minus inventory divided by current liabilities, and it is a more conservative liquidity ratio. If the ratios are less than one, the company lacks the assets to pay for its liabilities and will have to borrow money or make other arrangements.