Posted by admin on Aug 19, 2010

 

Financial Ratios &  High Risk Accounts

Financial ratios are an important part of the underwriting of a high risk merchant account.  Financial ratios help determine the strengths and weaknesses of company operations and judge the stability of a company. 

Here are a few of the most commonly used financial ratios in underwriting a high risk merchant account.

Profitability Ratios

Profitability ratios determine the use of assets and control of expenses to generate a rate of return.

  • Gross profit margin = (Net sales - Cost of goods sold) / Net sales
  • Return on Sales (ROS) = Earnings before interest and taxes / Sales
  • Net profit margin = Net profits after taxes / Sales
  • Return on investment (ROI) = Net income / Total assets
  • Current ratio = Current assets / Current liabilities
  • Acid-test ratio (Quick ratio) = (Current assets - Inventories) / Current liabilities

Activity Ratios

Activity ratios measure how quickly a company converts non-cash assets to cash assets.

  • Average collection period = Accounts receivable / (Annual credit sales / 360 days
  • Average payment period = Accounts payable / (Annual credit purchases / 360 days)

Debt Ratios

Debt ratios measure an organizations ability to repay long-term debt. Debt ratios measure financial leverage.

  • Debt to assets ratio = Total liabilities / Total assets
  • Debt to equity ratio = (Long-term debt + Value of leases) / Stockholders' equity
  • Long-term debt/Total asset (LD/TA) ratio = long-term debt / Total assets

Market Ratios

Market ratios measure investor response to owning a company's stock and the cost of issuing stock.

  • Payout ratio = Dividend / Earnings
  • P/E ratio = Price / Earnings per share
  • Price/cash flow ratio = Price of stock / present value of cash flow per share

Conclusion

Underwriters ask for financials statements for high risk merchant accounts to determine the financial stability of your company. Keep this in mind as you prepare your application. Present your financials in the best light to increase account approval.  

How do your financials affect approval for high risk processing?

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