• Ratio analysis is a financial tool that helps decision-makers and stakeholders evaluate a business's financial performance by analyzing its financial statements.
• Balance Sheet and Income Statement
• To analyze the firm’s position (e.g. short-term liquidity, long-term liquidity, etc.)

It’s purpose is to:

• Assess financial performances (i.e. ability to control expenses)
• Compare actual with projected or budgeted figures (variance analysis)
• Aid in decision-making (to invest or not)

Profitability Ratio’s

• These examine profit in relation to other figures. It is relevant to profit-seeking businesses and has stakeholders’ interests. Absolute profit – tells little about a firm’s performance

Differences between GPM and NPM represent expenses.

A larger difference means more difficult overhead control | Key Ratio:

Measures a firm's financial performance compared with the amount of capital invested.

Figures show a profit as a % of the capital used to generate it ROCE should be higher than the interest rate in banks

CE: Non Current Liabilities+Share Capital + Retained Earning | | Gross profit / Sales revenue x 100 | Net profit before interest and tax / Sales revenue x 100 | Net profit before interest and tax / Capital employed | | Improved by: Raising sales revenue Increase or decrease prices depending on price elasticity) Marketing Reducing direct costs Outsource production to other 3rd party suppliers. Launching a new product. | Improved by: Same as GPM but costs can be examined further Negotiate preferential payment terms with creditors and suppliers to improve working capital Negotiate cheaper rent Reduce indirect costs | Improved by: Employ strategies to improve net profits

Technically decreasing capital employed will improve the ratio, but this is not desirable

Increasing sales revenue. |

Liquidity Ratios

Ability of the firm to pay its short term liabilities. How fast can you pay of debts. Not using external sources of finance.