For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms. In isolation, a financial ratio is a useless piece of information. In context, however, a financial ratio can give a financial analyst an excellent picture of a company's situation. (www.finpipe.com)
Similarly comparison of accounting ratios of different years helps us to indicate the trend of the business and the its various parameters and also indicates the results of various policies and measures taken by the management during the course of the business.
1. ROI ( Return on Investment ) : The most important ratio under the profitability ratio category. It is the comparison of profit earned and the capital employed to earn it. The capital employed is generally taken as the sum of net fixed asset and net working capital.
2. Gross Profit Ratio : This is calculated as Gross Profit / Sales *100. It shows the relationship of Sales Revenue to Cost of Goods Sold and year wise comparison will throw some light on the efficiency of the manufacturing process.
3. 3. Net Profit Ratio : This is calculated as Net Operating Profit/Sales *100.This is a very important ratio as its comparison over years shows the operational efficiency of the business if Gross Profit Ratio remains constant over years. ( Maheshwari , S N , 1994 ). Also a business to remain profitable , the Net Profit Ratio must be greater than the cost of capital.
B. Turnover Ratio:
Turnover ratios judge how well the facilities at the disposal of the concern are being used .The ratios are known as turnover ratios as they express the rapidity with which a unit of capital invested in fixes assets , stock etc. produces sales. ( Grewal, S T , Shukla , M T , 1997)
1. Capital Turnover Ratio : It is calculated as Sales/ Capital Employed and indicates how efficiently the capital is generating sales.
2. Fixed Asset Turnover Ratio : It is calculated as Sales/ Net Fixed Assets. It is very important in manufacturing concern as an improvement in the ratio over the years indicate prudent investment in Fixes Assets.
3. Working Capital Turnover