Ratio Analysis: Cons And Advantages Of Ratio Analysis

This measures the relationship between net profits and sales of a firm. The net profit margin is indicative of management’s ability to operate the business with sufficient success not only to recover revenues of the period, the cost of merchandise or services, the expenses of operating the business and the cost of the borrowed funds, but also leave a margin of reasonable

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Financial ratios are important because they help investors make decisions to buy hold or sell securities.

Net profit margin ratios is sales into net income, a reflection of how well sales have done once you take expenses out of the equation.

One business where ratios are used for benchmarking is Major League Baseball. “If you can’t measure it, you can’t manage it.” – Peter Drucker. Data is very important in the game of baseball and ratios maybe used more in this sport than any other. The game of baseball has many stats which are kept to determine the

The net profit margin helps investors understand how profitable a company is. This explains how much profit a company has per dollar of sales. ABC SDN. BHD. has a net profit margin of

Ratios describe the various relationships among accounts in the balance sheet and income statement. Financial ratios are important and helpful gauges of how an organization is functioning. An organization’s financial health, potential revenue, and even possible bankruptcy can be garnered from financial ratios. Information derived from financial statements is used to calculate most ratios and make projections. “Ratios help investors and lenders determine the risk associated with lending or investing funds in an organization” (GE Financial Healthcare Services, 2003, para 1). According to Finkler and Ward (2006), “the key to interpretation of ratios is benchmarks. Without a basis for comparison, it is

Aerts and Walton (2013) expressed ratio analysis as connection between two elements of financial statements. According to them, ratios analysis allows to compare the incomparable elements in different companies. In other words, we may say that comparing profit on its own between two companies would not give a reliable conclusion on organisations’ profitability. If would simply ignore profit relationship with other financial elements like cost of goods, which itself affects the proportion of profit. This is where ratio analysis becomes a useful instrument. It allows us to draw the link between two different sales figures and two different cost of goods figures and eventually makes results comparable between two organisations. Lasher (2014) added that ratios are only valuable as a tool when they are compared with the ratios of other companies. To make investment decisions easier, we will compare industry averages later in the report.

Examining financial ratios for a particular period of time can be used to identify unusual changes thus alerting the management on the progress of the business venture. Financial ratios are also helpful in carrying out financial analysis and forecasting. They also allow the owner of the business and the entire management to come up with business specific goals that can easily be traced to determine the company’s progress towards achieving them.

Net profit margin considers how much of the company’s revenue it keeps when all expenses or other forms of income have been considered, regardless of their nature.

Financial ratios have proven to be a useful tool for effective financial management and planning. Primarily known for improving the understanding of financial results and trends over time, financial ratios are a unique way to provide a quantitative analysis to communicate overall organizational performance. This tool is useful for managers to focus in on the company’s strengths and weaknesses from which strategies and operations can be formed. Investors are also commonly known to use ratios to measure results against other companies to make appropriate judgments regarding management effectiveness and mission impact. For ratios to be deemed meaningful and useful, they require reliable and accurate calculated information. This is simple

The net profit ratio expresses the connection between net profit and net sales as a percentage. It point out the border of success of the company. It give you an idea about how much money is left to cover operating expenses and how much is left for net profit to give back to the shareholder.

Ratios are used to interpret the financial situation and performance of the company differently depending upon who is assessing the information, what problem they are trying to solve, and/or what decision they trying to make.

Ratio analysis is the correlation of diverse amounts or number in company financial account to sort how successful a company is. It’s an effective tool that can help you to know the financial results and change of trend over time and use to evaluate company performance. Furthermore company can find their strengths and weaknesses through which you can estimate future financial performance.

Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.

According to our reading text, ratios are used to make comparisons between different aspects of a company's performance or how the