Financial Literacy

The financial literacy section contains articles and tools designed to improve your ability to get and repay loans, choose the right credit products, and more.

Debt to Asset Ratio

This ratio measures the extent to which the assets of the business are funded by loans and other borrowings including trade creditors. Assets can be funded either from borrowings (including trade creditors) or from owners’ equity (including retained profits). A business uses its assets to generate income which is used to pay off creditors and interest on borrowings (among other things). If the asset base is not large enough, it is possible that insufficient income might be generated to cover all borrowing costs.

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Gross Profit Margin

This ratio is used mainly for manufacturing businesses or those that purchase and further develop materials for sale. It measures the value added to purchased materials through the manufacturing or development process.

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Operating Profit Margin

This is similar to the gross profit margin, except it measures the extent to which the total sales figure is converted into profit after the normal costs of running the business have been met. It is normally presented as a percentage and represents the return the business is earning from normal operating activities. As with gross profit margin, there is no "normal" operating profit margin. The higher the percentage the better is the rule to go by. 

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Return on Equity

This is a measure of the return that owners of the business make on their investment. In an owner owned business, it represents the rate at which profit is being generated for every currency unit invested (including retained capital). However, as with the Debt to Equity Ratio above, it really comes into its own in businesses that have outside shareholders. It represents the return they can expect their investment to generate for the business which, they hope, will be transferred to them by way of dividends or capital gains on the value of their shareholdings.

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