... These comparisons are called “ratio analysis”.
Ratio analyses have been developed to help establish the state of health of various financial aspects of your business. ...
Ratio analysis sounds intimidating but it really isn’t. ... These ratios can be expressed in the format "2:1," (a ratio), 150% (a percentage), or 4/1 (a fraction). ... There are five types of profitability ratios:
· Net profit margin
· Gross profit margin
· Return on Assets
· Return on Investment
1) Net Profit Margin (also known as Return on Revenues or Return on Sales)
This ratio tells you how much net income is derived from every dollar of net revenues. ... I consider this ratio to be key financial indicator of the profitability of the business, and one that needs close monitoring. ... This ratio should be reviewed against other similar businesses and reviewed to get an understanding of positive or negative trends over time.
If you decide that your net profit margin ratio is lower then desired, you may be able to raise it by the doing the following:
1) Increase your sales revenue. ... This ratio is useful for businesses that maintain inventory and generate sales from it. ...
3) Return on Assets (also known as Investment Turnover) – DOULBE CHECK ON THIS – DIFFERNET MATERIAL HAS DIFFERNET FORMULAES
Return on assets is the ratio of net income to total assets. ...
Return on Assets = Net Profit / Total Assets
In general, the higher the ratio, the stronger the business. ...
4) Return on Investment, commonly referred to as ROI (also known as Return on Equity)
This ratio is another valuable method of measuring profitability. The ratio of net income to Owners equity shows you the return what youve earned on your investment in the business.
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