FINANCIAL RATIOS

Financial ratios

Financial ratios

1.) Define Ratios

Financial ratios are calculated from one or several pieces of information from financial statements of a company. For example, a 'gross margin is EBITDA divided by total sales or profits of an enterprise, expressed as a percentage. In isolation, a economic ratio is a useless part of information. In this context, however, a financial report can provide an excellent picture of financial position within a company's analyst and trends that are developing.

A report of utility gains compared with other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless in itself. If we know that competitors of this company made a profit of 10%, we know that it is more profitable than its peers in a industry are very favorable. (Dimitras, 2006, p263)If we also know that a historical trend is upward, for example, has risen steadily in recent years, there is also a good sign that a implementation of policies and strategies in business management.

Financial ratios describe a relationship between different aspects of running a small business. They involve a comparison of elements from a balance sheet or income statement, and points of interest taken in mind. Financial ratios can provide small business owners and managers with a valuable tool to measure their progress against predetermined internal goals, a competitor of some or all of these areas. Profitability or come back on buying into ratios

Profitability ratios provide information on performance management using resources of small businesses. As Gill said, most entrepreneurs decide to start their own businesses to get a better return on their money than is available through a bank or other low risk investments. If a profitability ratios show that it is not done, especially once a small company has passed a first phase, a contractor, you should consider selling a company and reinvest their money elsewhere.

Gross profit: Gross profit / net sales to offer margin on sales of a company is achieving. It could be an indication of manufacturing efficiency or marketing effectiveness. Net profitability: net profit / net sales, measures a overall profitability of a company or any amount is increased a bottom line. Strong gross profitability combined with weak net profitability may indicate a problem with a indirect costs of operating or something non-operating such as interest expense. In general terms, net profitability shows a effectiveness of management. Although a optimal level depends on a type of activity, a ratio is compared to a same industry(Dev, 2007, p61).

Back to assets: net income / total assets, shows how a company would allow a property. Roa low usually indicates poor management, while a very effective management Roa. However, this ratio may be distorted by depreciation or any unusual expenses. The behavior of a value of a company, given a decision to study. We also show limitations of traditional financial ratio analysis to achieve a goal of maximizing corporate value. However, it is important to note that many factors can ...