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# Main financial ratios

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### Main financial ratios

1. 1. Main Financial RatiosAuthor: Jim Riley Last updated: Wednesday 24 October, 2012Main ratios (introduction)In our introduction to interpreting financial information we identified five main areas forinvestigation of accounting information. The use of ratio analysis in each of these areas isintroduced below:Profitability RatiosThese ratios tell us whether a business is making profits - and if so whether at an acceptable rate.The key ratios are:Ratio Calculation CommentsGross ProfitMargin[Gross Profit /Revenue] x 100(expressed as apercentageThis ratio tells us something about the businesss abilityconsistently to control its production costs or to managethe margins its makes on products its buys and sells.Whilst sales value and volumes may move up and downsignificantly, the gross profit margin is usually quitestable (in percentage terms). However, a small increase(or decrease) in profit margin, however caused canproduce a substantial change in overall profits.OperatingProfit Margin[Operating Profit /Revenue] x 100(expressed as apercentage)Assuming a constant gross profit margin, the operatingprofit margin tells us something about a companysability to control its other operating costs or overheads.Return oncapitalemployed("ROCE")Net profit beforetax, interest anddividends("EBIT") / totalassets (or totalassets less currentliabilitiesROCE is sometimes referred to as the "primary ratio"; ittells us what returns management has made on theresources made available to them before making anydistribution of those returns.Efficiency ratiosThese ratios give us an insight into how efficiently the business is employing those resourcesinvested in fixed assets and working capital.