A key ratio is a business instrument used primarily by analysts and accountants to show how well a business is doing based on the factors used in the ratio. There are many types of key ratio measurements, but they generally detail the amount of money a business has versus the amount it owes. In general, businesses that have a higher ratio of assets are more successful. One reason this measurement is used is to allow analysts to see how a business is doing against its competition, and to see how well management is doing. This also helps analysts look at key factors of the business and judge how well those are doing.
The key ratio measurement is not a single type of measurement; it can be based on any two different accounting principles or other factors. The ratio commonly details the amount of money the business currently has, such as assets, versus what the business owes in bills, taxes and other expenses. Most of the time, the business will want a higher asset ratio.
While it does not always correlate, the key ratio commonly is used to judge a business’s success based on the two competing factors. For example, if the ratio is determining how much money the company made against loans taken out to finance a project, then the project normally will be deemed a success if there is a higher ratio of money coming in. Companies with a better ratio normally do better than their competition, but not always.
This also is used to judge management’s success and as a figure to judge how well the company is doing against its competition. If the key ratio looks good, then this normally shows that management did a good job in using money and securing sales. When used as a comparison for competition, analysts will use the same ratio equation on both companies and the resulting ratios are placed side by side to judge how well one company did against the other.
The key ratio can be used to compare just about any business measurement, so it also may assist analysts in judging how well a company did in its key factors. These factors are integral to success, such as determining profitability, how often loans are paid off and how well the company is using money from stocks. This usually makes it easier for analysts to break down a company’s core factors so they can be individually investigated for any problems.