How the use of ratios can help when analyzing profitability, liquidity, efficiency and capital structure of businesses

How to calculate the main financial ratios for a company.

Blockchain for Business.

Ratio analysis involves the comparison of financial data to gain insights into business performance.

The main ratios that would be relevant for a company would be,

• Profitability
• Liquidity
• Efficiency
• Shareholder ratios
• Capital structures.

To get the ratios in any of these areas you will need to get the percentages for key figures. If we take profitability as an example we will need a company’s figures to hand. These would be calculated as follows.

1. Return on Capital Employed Net Profit / Capital Employed x 100 = %

2. Gross Profit Margin Gross Profit / Sales x 100 = %

3. Net Profit Margin Net Profit / Sales x 100 = %

To get liquidity we look at assets and liabilities.

For efficiency we look at Turnover, sales and trading ect…

All of the above ratios are an examination of a company’s work broken down from their figures. A ratio is a good indicator for the health of any aspect of the company in short form so that you don’t need to break down financial documents yourself.

All of this information is contained within the financial reports for a company which can then be broken down and taken apart to look at it's actual viability. Understanding how the different figures affect the business is a key part of an financial accountants job and very important due diligence for anybody looking to get involved with the company.

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