Resources | Subject Notes | Accounting
Prepare and comment on simple statements showing comparison of results for different years.
Accounting ratios are powerful tools for analyzing a company's financial performance and position. By comparing ratios over different periods, we can identify trends, assess improvements or deteriorations, and make informed judgments about the company's health.
These ratios measure how well a company generates profit from its operations.
Indicates the percentage of revenue remaining after deducting the cost of goods sold. A higher ratio is generally better.
Shows the percentage of revenue that translates into net profit after all expenses are deducted. A higher ratio is desirable.
Measures how effectively a company uses its capital to generate profit. Capital employed typically includes total assets less current liabilities.
These ratios assess a company's ability to meet its short-term obligations.
Indicates whether a company has enough liquid assets to cover its short-term liabilities. A ratio greater than 1 is generally considered healthy.
A more stringent measure of liquidity, excluding inventory which may not be easily converted to cash. A ratio greater than 1 is preferred.
These ratios evaluate a company's ability to meet its long-term obligations.
Shows the proportion of debt and equity used to finance a company's assets. A lower ratio generally indicates less financial risk.
These ratios measure how efficiently a company uses its assets.
Indicates how many times a company sells and replaces its inventory during a period. A higher ratio suggests efficient inventory management.
Measures how quickly a company collects its debts from customers. A higher ratio is generally better.
The following table shows a simplified comparison of a company's financial results for the years 2022 and 2023.
Ratio | 2022 | 2023 | Change |
---|---|---|---|
Net Profit Ratio | 5.0% | 6.0% | +1.0% |
Current Ratio | 1.8 | 2.1 | +0.3 |
Debt-to-Equity Ratio | 0.8 | 0.9 | +0.1 |
Inventory Turnover Ratio | 8.0 | 7.5 | -0.5 |
In the example above, we can observe the following:
By comparing accounting ratios over different periods, we can gain valuable insights into a company's financial performance and identify areas of improvement or concern. It's important to consider ratios in context and compare them to industry averages for a more meaningful analysis.