Financial Benchmark Ratios

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Net Income as a Percent of Net Sales

= (Net Income Before Taxes ÷ Total Net Sales) x 100
What it is
This ratio is the broadest measure of a store’s performance. It includes debt, taxes, and any other income or expenses not related to your store’s operations. It measures the rate of net income (profit) your store is able to generate from sales.
Why it matters
A higher ratio is preferable. A lower ratio, as compared to industry or previous outcomes, should result in a closer look into other ratios.
Other ratios or actions to consider
Review cost of sales, selling expenses, operating expenses, interest, and other nonoperating income and expenses.
 
Operating Income as a Percent of Net Sales
= (Total Net Sales – Cost of Goods Sold – Total Operating Expenses) ÷ Total Net Sales x 100
What it is
This ratio is another broad measure of the store’s profitability from operations, without regard to interest charges, taxes, and nonoperating income or expense. It is an indicator of the effectiveness of your store’s total selling, purchasing, administrative, and other operating efforts.
Why it matters
A higher ratio is preferable. A lower ratio, as compared to industry or previous outcomes, should result in a closer look into other ratios.
Other ratios or actions to consider
Consider cost of sales, selling expenses, and operating expenses.
 
Current Ratio
= Current Assets ÷ Current Liabilities
What it is
This ratio is a measure of your store’s ability to generate cash to pay its short-term debts: a gauge of your store’s liquidity.
Why it matters
A larger ratio indicates a greater ability to pay bills.
Other ratios or actions to consider
Reference the quick ratio as well.

 

Quick Ratio

= (Current Assets – Physical Inventory) ÷ Current Liabilities
What it is
This benchmark, also referred to as the “acid test ratio,” is a measure of the store’s ability to pay immediate liabilities. It is a more stringent measure than the Current Ratio because it does not include the merchandise inventory, which may not be readily convertible to cash.
Why it matters
A ratio of 1.0 or greater is considered to be in a liquid condition; the larger the ratio, the greater the liquidity. A low ratio or significant changes, as compared to previous outcomes, should trigger a review of cash flow.
Other ratios or actions to consider
Cash levels, accounts receivable, and accounts payable can affect this measure.
 
Return on Assets (ROA)
= Net Income Before Taxes ÷ Average Total Assets
What it is
This measure reflects the store’s efficiency at creating revenue from assets.  
Why it matters
A higher ratio indicates your store is earning more on less investment in assets. A low ROA may indicate several things, such as too much cash is being held, accounts receivables are too high (consider a review of credit and collections policies), excessive inventory levels (consider an assessment of buying and inventory policies and procedures), or an ineffective use of space.
A few notes about this ratio:
  • Depreciation or unusual expenses can distort this ratio.
  • Only presents a picture of the store at the time the figures were prepared. To compare correctly, calculate this ratio at the same of year, year after year.
Other ratios or actions to consider

Consider review of sales per square foot of selling space by departments, credit and collection policies, and buying and inventory policies to determine the best use of space.

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