Operating Performance Ratios
Ways to Improve: Sales to Assets Ratio: Two ways to improve this ratio. 1) Better deploy the assets in the business to generate more sales. 2) If increasing sales is not possible, reduce the volume of assets to the bare minimum or the business will be carrying assets that it is not using properly or adequately (another unnecessary expense).
- Back to Sales to Assets Ratio -Return on Assets Ratio: Following the Sales to Asset Ratio above, the business should either increase sales (keeping all other expenses constant) or reduce or sell off any under performing assets. Additionally, the business could also seek to reduce any and all expenses to their bare minimum - to include reducing variable costs (cost of goods sold) or fixed costs (overhead or operating expenses).
- Back to Return on Assets Ratio -Return on Equity Ratio: A low ratio demonstrates the business is not utilizing the equity in the business to its fullest. Improving this ratio, can consist of increasing sales (keeping all else the same), reducing all expenses (where possible) or reducing the amount of equity invested in the business. The goal is to get the most return on any investment injected into the business as this injection is usually the most expenses (most give up a portion of the business to investors of outside equity - or if owner's equity, it could have been deployed in other investments earning larger returns). To that note, this ratio should also be compared to other similar risk investments to determine if the return on the equity placed in the business is being utilized properly. Example, if similar investment are generating 30% in returns and your business is only generating 20% in returns, these funds (equity) would be better off in the other investment - unless the business can start generating 30% or better returns.
- Back to Return on Equity Ratio -Other financial ratio calculations you may want to evaluate:
Disclaimer: These ratios are for education purposes only and are in no way an adequate substitute for a professional financial advisor.
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