Several ratios are used to compare business performance:
- Return on capital invested = (Net profit ÷ Total assets) × 100 — tells the business owner whether to stay in business.
- Return on capital employed = (Net profit ÷ Capital employed) × 100.
- Current ratio = Current assets ÷ Current liabilities — measures the relationship between the two.
- Acid test (quick) ratio = (Current assets − Stock) ÷ Current liabilities — measures the relationship between quick assets and current liabilities, excluding stock which may be harder to convert to cash quickly.
Worked Example
From a balance sheet showing fixed assets of 1,750,000frs, current assets of 450,000frs, and current liabilities of 650,000frs:
- Current ratio = 450,000 ÷ 650,000 ≈ 0.69
- Acid test ratio = (450,000 − stock) ÷ 650,000, using the current assets minus the value of stock.
