financial ratios

Topics: Generally Accepted Accounting Principles, Financial ratios, Revenue Pages: 4 (1144 words) Published: November 20, 2013

Gross Profit to Sales (Gross Profit Ratio): profitability ratio that shows the relationship between gross profit and total net sales revenue. Gross margin/Net sales
The gross margin is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. In general, a company's gross profit margin should be stable. Operating Expenses to sales (Operating ratio): shows the efficiency of a company’s management. Operating expenses/Net sales
(Operating Exp=Cost of Good Sold + Total Exp – Depr – Interest) The smaller the ratio, the greater the organization’s ability to generate profit if revenues decrease. Net Earning to Sales (Profit margin): profitability ratio that measures how much out of every dollar of sales a company actually keeps in earnings. Net income/Revenues or Net profits/Sales

Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20\% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. Current Ratio: A liquidity ratio that measures a company's ability to pay short-term obligations. Current assets/Current liabilities

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there...
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