09 Nov Profitability Ratios
1. After reviewing all of the ratios, I believe that Profitability Ratios to be the most important ratio because it measures the efficiency in how the business produce income. Gross profit margin is one of three common margin ratios derived from your income statement. However, The Business Owner indicates that it is not only the most important margin ratio but one of the most important financial analysis tools you have. Gross margin is gross profit divided by revenue. The other two common profit margin ratios are operating margin and net margin. These are calculated by dividing operating profit by revenue and net profit by revenue. Operating profit equals gross profit minus fixed costs.
2. My opinion on ratios and which one is most important is the solvency ratio. Liquidity and profitability each sound very important but I feel that solvency is first. When you’re using the solvency ratio you have to think about having the ability to pay back. If your profit is not sufficient enough then how do you provide services and also act as a consumer. If you need a building for the services that you provide how will the loan be paid if there is not enough profit generated. Next I would say liquidity comes next on a scale of importance and last profitability ratios. You could also look at it as profitability, solvency, then liquidity. I think its all in how the company provides a service.
3. A financial ratio is the number which shows the relationship between two elements of the organization financial statement. The three different financial ratios are Return of Sales, Current Ratio and Inventory. The most important of the three I believe is the return of sales financial ratio. The measuring of the firm’s ability to earn profit is done through this procedure. The firm’s net income after the taxes will indicate whether the firm will gain or not. The return of sales is calculated by dividing the net income of the firm after taxes paid by the net sales of the firm. The firm is effective or not is estimated by the return on sales value. A higher return on sales indicates higher profit. Average return of sales is between four and five for all firms. A low return on sales can be corrected by lowering the expenses and increasing the sales or both.
4. All of the ratios have a part that must be played so that on organization can show a good performance. I believe that the most important ratios discussed in this chapter would be the profitability ratios. This is because it has to do with profit of an organization. This is the amount of funds that generated which can sink or swim an organization. If run correctly, then the organization should mostly have a positive profit. With a positive profit the organization can stay in business.
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