One way to interpret a
financial report is to compute ratios, which means, divide a particular number
in the financial report by another. Financial statement ratios are also useful
because they enable the reader to compare a business's current performance with
its past performance or with another business's performance, regardless of
whether sales revenue or net income was bigger or smaller for the other years
or the other business.
Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don't report any ratios. One ratio that's a useful indicator of a company's profitability is the gross margin ratio. A profit ratio of 5 to 10 percent is common in most industries, although some highly price-competitive industries, such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.
There aren't many ratios in financial reports. Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don't report any ratios. Generally accepted accounting principles (GAAP) don't require that any ratios be reported, except EPS for publicly owned companies.
One ratio that's a useful indicator of a company's profitability is the gross margin ratio. Businesses don't discose margin information in their external financial reports.
The profit ratio is very important in analyzing the bottom-line of a company. It indicates how much net income was earned on each $100 of sales revenue. A profit ratio of 5 to 10 percent is common in most industries, although some highly price-competitive industries, such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.
Ratios don't provide definitive answers. They're useful indicators, but aren't the only factor in gauging the profitability and effectiveness of a company.
Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don't report any ratios. One ratio that's a useful indicator of a company's profitability is the gross margin ratio. A profit ratio of 5 to 10 percent is common in most industries, although some highly price-competitive industries, such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.
There aren't many ratios in financial reports. Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don't report any ratios. Generally accepted accounting principles (GAAP) don't require that any ratios be reported, except EPS for publicly owned companies.
One ratio that's a useful indicator of a company's profitability is the gross margin ratio. Businesses don't discose margin information in their external financial reports.
The profit ratio is very important in analyzing the bottom-line of a company. It indicates how much net income was earned on each $100 of sales revenue. A profit ratio of 5 to 10 percent is common in most industries, although some highly price-competitive industries, such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.
Ratios don't provide definitive answers. They're useful indicators, but aren't the only factor in gauging the profitability and effectiveness of a company.
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