The way of understanding the risks and profitability of the company/ firm through reported figures in financial statements is Financial Statements Analysis. Various types of analysis may be conducted but the most commonly uses is 'Financial Statements Ratio Analysis'. Two types of ratios are calculated that are Profitability ratios & Risk ratios.
Profitability Ratios:
Profitability ratios calculates the utilization of capital invested to generate profits.
1) ROE ' Return on Equity': Earnings
Average Equity
Equity means the total capital invested plus retained profits.
2) Gross Margin ratio
3) Net profit margin Ratio
Net Profit/ Sales
4) Gross Profit margin ratio
Gross profit/ Sales
Apart from the above mentioned there are various profitability ratios.
Credit Risk Ratios:
These ratios calculates underlying credit risk of the company. Liquidity analysis and solvency analysis. Liquidity analysis returns the efficiency of working capital cycle.
Working Capital:
Working capital represents the net current assets. Net current asset means the current assets less current liabilities.
Profitability Ratios:
Profitability ratios calculates the utilization of capital invested to generate profits.
1) ROE ' Return on Equity': Earnings
Average Equity
Equity means the total capital invested plus retained profits.
2) Gross Margin ratio
3) Net profit margin Ratio
Net Profit/ Sales
4) Gross Profit margin ratio
Gross profit/ Sales
Apart from the above mentioned there are various profitability ratios.
Credit Risk Ratios:
These ratios calculates underlying credit risk of the company. Liquidity analysis and solvency analysis. Liquidity analysis returns the efficiency of working capital cycle.
Working Capital:
Working capital represents the net current assets. Net current asset means the current assets less current liabilities.
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