StudyDriver in your
Smartphone!

# Accounting Ratios and Conducting Business Profitability Finance Essay

 Check out more papers on Balance Sheet Debt Interest

Accounting ratio are the ratios used to evaluate a quantitative analysis of information in a company’s financial statement. Ratios being expressed and counted based on the accounting figures derived from financial statements of the company. Ratios are calculated to compare to previous years, others companies, the industry, or even the economy to judge the performance of the company from current years number. Accounting ratios helps to conduct the profitability of the business which helps the management understand about the earning capacity of the business concern. It also shows the relationship between the liabilities and assets ensure the solvency of the company can be measured.

Otherwise, accounting ratios is quite helpful in analysis of financial statement and also in comparative analysis of the performance. Ratios analysis will lets the outsider know about the profitability of the company and encourage them to pay for interest and dividend etc. Companies will easy to improve their weak point with the helps when compare to others companies. Accounting ration will also helps to work out the operating become more efficiency when all turnover are worked out to evaluate the performance of the business. Ratio analysis is helpful to work out short term financial position and also in the forecasting purpose. 1.1 Five different aspect of business measured by accounting ratio Accounting ratios have a various type for the business measured, there are counted and grouped into five different aspect to extrapolate the business performance.

The five types of accounting ratio are: Profitability of company Liquidity of company Asset management of company Debts management and capital gearing of company Market value of investment to ordinary shareholders/ common stockholders 1.1.1 Profitability of company Profitability ratios are used to estimate a business ability and value to arise earning as compared to expenses over a specified time period. From the indicative of ratio between a competitor ratio and previous period ratio will know about the company does well or not.

Profitability of company is measured by: Gross profit markup (%) = Gross profit x 100 Cost of goods sold Where Cost of goods sold = Opening stock + Purchase – Closing stock Gross profit margin (%) = Gross profit x 100 Net sales value Where Net sales = Sales – Return inwards Operating profit margin (%) = Operating profit before interest and taxation x 100 Net sales value Profit margin on sales (%) = Net income available to common stockholder x 100 Net sales value = Profit after interest, tax, preference dividend and minority interest x 100 Net sales value Basic earning power (BEP) = Operating profit before interest and taxation x 100 Total assets Where Total assets = Fixed assets + Current assets Return on total assets (ROA) = Net income available to common stockholder x 100 Total assets = Profit after interest, tax, preference dividend and minority interest x 100 Total assets Return on common equity = Net income available to common stockholders x 100 Common equity = Profit after interest, tax, preference dividend and minority interest x 100 (Ordinary share capital + Reserve) OR (Total assets – Total liabilities) 1.1.2 Liquidity of company Liquidity ratios express the ability of a company to meet its short term financial obligation. This is also the result of dividing the total cash by short term borrowing. Liquidity of company is measured by: Current ratio / Working capital ratio = Current assets . Current Liabilities Liquid ratio / quick ratio / acid-test ratio = Liquid assets . Current liabilities 1.1.3 Asset management of company Asset management of company can also called as an efficiency ratios. It is measure the quality of business receivables and how efficiently it uses and controls its assets, how effectively the firm is paying supplier, and whether the business is overtrading or under trading on its equity. Assets management of company is measured by: Inventory turnover or Stock turnover: Inventory turnover = Cost of sales OR Average stock value Stock turnover = Cost of sales . Closing stock value Average stock value = (Opening stock value + Closing stock value) / 2 Fixed assets turnover = Net sales . Fixed assets net book value Where Net sales = Sales – Return inwards Total assets turnover = Net assets where Net sales = Sales – Return inward and Total assets Total assets = Fixed assets + Current assets Debtor ratio = Debtor . Credit sales Debtor payment period = Debtor ratio x 365 days / 52 weeks / 12 months (In days / weeks / months) = Debtor x 365 days / 52 weeks / 12 months Credit sales Days sales outstanding (DSO) = Debtor x 365 days OR Credit sales = Debtor . (Annual credit sales / 365 days) 1.1.4 Debts management and capital gearing of company Debts management and capital gearing of company is measure about the total debt to its total assets of a company’s. It is also a estimate of how risky the company will be for a bank to extend a loan to company, with a higher ratio meant great risk.

Did you like this example?

Accounting Ratios And Conducting Business Profitability Finance Essay. (2017, Jun 26). Retrieved July 13, 2024 , from

Save time with Studydriver!

Get in touch with our top writers for a non-plagiarized essays written to satisfy your needs

Get custom essay

## Stuck on ideas? Struggling with a concept?

A professional writer will make a clear, mistake-free paper for you!

##### Leave your email and we will send a sample to you.
Stop wasting your time searching for samples!
You can find a skilled professional who can write any paper for you.
Get unique paper

Hi!
I'm Amy :)