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Using a Large Number of Ratios to Perform a Complete Ratio Analysis of a Firm - Essay Example

Author : eudora63
Pages 3 (753 words)
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Summary

The ratios can be divided into various categories such as profitability, gearing and liquidity, each focusing on a different area of the financial outlook of the organization and highlighting the company’s performance. …

Extract of sampleUsing a Large Number of Ratios to Perform a Complete Ratio Analysis of a Firm

It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company.
Profitability Ratios
Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials [1], variable cost related to labor and fixed costs such as rent and depreciation of property plant and equipment. The ratio is calculated by dividing the sales revenue by the gross profit. Net profit margin, on the other hand analyzes the profitability of the company before deducting the taxation and finance charges from the earnings. The ratio is calculated by dividing the profit before interest and tax with the sales revenue of the current financial period. The ratio highlights how well the company is managing its selling and administrative expenses it also highlights the other income generated by the company during the course of its operations.
Return on capital employed (ROCE) is, according to the analyst, is considered to be the most significant ratio. ...
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