Ratio Analysis in Financial Accounting
http://www.accountingformanagement.org http://www.accounting4management.com NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment.
This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while interpreting the ratio it should be kept in mind that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales.
Return on capital employed ratio measures the efficiency with which the investment made by shareholders and creditors is used in the business. Managers use this ratio for various financial decisions. It is a ratio of overall profitability and a higher ratio is, therefor, better.
To see whether the business has improved its profitability or not, the ratio can be calculated for a number of years.
Return on equity (ROE) is widely used to measure the overall profitability of the company from preference and common stockholders’ view point. The ratio also indicates the efficiency of the management in using the resources of the business.
Higher ratio means high return on shareholders’ investment. Investors always search for the highest return on their investment and a company that has higher ROE ratio than others in the industry attracts more investors.
Fixed assets ratio
If fixed assets to stockholders’ equity ratio is more than 1, it means that stockholders’ equity is less than the fixed assets and the company is using debts to finance a portion of fixed assets. If the ratio is less than 1, it means that stockholders’ equity is more than the fixed assets and the stockholders’ equity is financing not only the fixed assets but also a part of the working capital.
This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while interpreting the ratio it should be kept in mind that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales.
Return on capital employed ratio measures the efficiency with which the investment made by shareholders and creditors is used in the business. Managers use this ratio for various financial decisions. It is a ratio of overall profitability and a higher ratio is, therefor, better.
To see whether the business has improved its profitability or not, the ratio can be calculated for a number of years.
Return on equity (ROE) is widely used to measure the overall profitability of the company from preference and common stockholders’ view point. The ratio also indicates the efficiency of the management in using the resources of the business.
Higher ratio means high return on shareholders’ investment. Investors always search for the highest return on their investment and a company that has higher ROE ratio than others in the industry attracts more investors.
Fixed assets ratio
If fixed assets to stockholders’ equity ratio is more than 1, it means that stockholders’ equity is less than the fixed assets and the company is using debts to finance a portion of fixed assets. If the ratio is less than 1, it means that stockholders’ equity is more than the fixed assets and the stockholders’ equity is financing not only the fixed assets but also a part of the working capital.