FINANCIAL RATIOS (Assignment)

FINANCIAL RATIOS (Assignment) - FINANCIAL RATIOS Financial...

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FINANCIAL RATIOS Financial data by itself may not give the complete picture about a company's performance and financial wellbeing. It is difficult to evaluate standalone numbers without comparing them to certain norms and standards. Ratios provide a set of standardised parameters which can be compared across companies. Ratios of a company can be evaluated against industry benchmarks to know the relative position of that company against its peers. There are various types of ratios depending on the nature of analysis required. Some ratios measure the operational strengths of a company while others measure the financial strength, valuation etc. of the company. Profitability ratios Gross profit to sales this ratio presents the gross profit as a percentage of total operating revenues of the company. Gross profit is arrived at by deducting cost of sales from revenues in the case of manufacturing and trading companies. In the case of a service company, the costs incurred for rendering the services are deducted from revenues. The ratio gives the gross margin enjoyed by the products sold by the company and is an indicator of the pricing power the company enjoys. However, in the case of multi-product or diversified companies this ratio may not give a clear picture. Operating profit to sales the ratio presents the operating profits as a percentage of operating revenues. Operating profits are profits before interest and taxes. Thus, the operating margin gives an idea of the profits generated before interest and taxes. In addition to being a measure of the pricing power enjoyed by the company, the operating margin also gives a broad idea about the efficiency of the company as well. Net profit to sales the net profit margin is calculated by dividing the net income after taxes by operating revenues. The ratio is a measure of the profits per rupee of sales which accrue to shareholders after settling all external claims. Return on assets also called return on investments, this ratio measures the net income before interest as a percentage of total assets. Interest expenses are added to the net income while calculating this ratio. The ratio is an indicator of the efficiency in using the assets. If the return on assets is lower than the average cost of funds, then the company is not doing a good enough job in squeezing
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returns out of its assets. Return on net worth also called return on shareholders' funds or return on equity, this ratio measures the returns generated by the company on funds provided by shareholders. The ratio is calculated as net income divided by shareholders' funds. Shareholders' funds include share capital, reserves and retained earnings belonging to the shareholders.
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