ratio cash profit gross ratios financial
3 Financial Ratios Every Tech Company Should KnowTechnology companies like yours have long been portrayed as the businessworld’s leading innovators. From Apple’s “1984” breakthrough TV commercialthat introduced the Macintosh to Samsung’s “Imagine” campaign for itsversatile smartphones, their marketing has emphasized the groundbreakingnature of their work.But while you find more ways to make life amazing, you still need to maintainyour bottom line – which means keeping tabs on some pretty important financialratios to ensure your security and longevity.Whether your company is a fledgling startup or an entrenched marketplaceveteran, here are the top three ratios that every tech company needs tounderstand and track.Cash Ratio – This liquidity ratio measures a company’s ability to pay forsomething with only the cash and cash equivalents on hand. (Cash equivalentsinclude such items as treasury bills, money market funds, checks awaitingdeposit or even gift cards.) Creditors use this ratio as a snapshot to see howwell you can fulfill a short-term financial obligation.Cash Ratio = (Cash + Cash Equivalents)/Current LiabilitiesIdeally this ratio should be close to even (1:1). A high cash ratio may meanthat you’re keeping too much cash on hand or aren’t processing yourcollections well. A low ratio could indicate that you’re relying too much onsales and inventory to pay your everyday bills.Debt-to-Equity Ratio – This ratio measures the solvency of your company andits ability to pay off long-term debts. It gives potential investors a betterlook at your company’s extended outlook and indicates the level of risk theymight face when lending you funds.Debt-to-Equity Ratio = Total Debt/Total EquityThere’s no concrete rule as to a good or bad debt-to-equity ratio, becausethis debt is often secured to further a company’s growth. It might fundresearch into new technology or the development of a groundbreaking product.Maybe it was used to hire more employees, purchase a larger facility orrelocate to an area with a better business climate and talent pool.All of these moves can pay off in the long run by resulting in new or betterproducts and services that increase sales and bring in more revenue. Thatsaid, you don’t want this ratio to be too high. Otherwise the cost of thisfinancing can outweigh the returns on your investments, and you risk goingbankrupt before you can turn a profit and pay the debt back.Gross Profit Margin – This is the measurement of gross profits earned fromsales, taking into account the cost of the goods sold (but not overhead orother costs). Gross profit margin can show the ability of a company to becomevery profitable in the near future – a crucial indicator in particular for astartup business seeking investors.Gross Profit Margin = (Sales – Cost of Goods Sold)/SalesTech firms tend to have high gross profit margins compared to otherindustries, especially established companies with higher brand namerecognition. Software and video game companies in particular require fewphysical materials and smaller workforces to make their high-demand products;for example, social game maker Zynga had a 65.87% gross profit margin in Q4 of2015. Startup tech companies won’t see numbers like this, but having even aslightly positive ratio here is a sign of potential growth.These three ratios won’t make or break your business, but they’ll give youvaluable insight on your company’s short-term and long-term health. Seekingsound financial advice will help you maintain healthy financial ratios –helping you establish better cash management practices and ensure smart growththat pays off down the road.