Financial accounting ratios
Analysis of financial ratios. Economist and firm owners use financial ratios to either gauge the performance of a firm over a period of time or compare and contrast the performance with regards to other firms they bench-mark with. These ratios are broken down are broken down to main categories as;
Profitability ratio. These ratios are used by stakeholders and other investors to evaluate the firm financial success overtime. First, the most widely used profitability ratios are; return on sales/net profit margin ratios; this ratio is used to measure the bottom-line profitability of a firm. Second, operating margin; this ratios measures both production and non-production cost of a firm .Third, gross profit margin; which measures the production cost of a firm.
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Market value ratio the price-earnings ratio is calculated by adding market price per share dividing with earnings per share and the market-to-book value ratio is calculated by adding all the book value of a firm and dividing the market value of the firm (Bhattacharyya 200).
The major advantage of market value ratio is the fact that it is easy to understand and calculate acts a good tool for comparison and it’s easily applicable all over the world. However, it does not show the value of intangible assets and finally fails to show the current prices of the items (Bhattacharyya 175).
Bhattacharyya, Hrishikes. Total Management by Ratios: An Analytic Approach to Management Control and Stock Market Valuations. New Delhi: Sage Publications, 2007. Internet resource.