This document discusses key financial ratios that can be calculated from a company's financial statements to analyze its performance and financial position. There are three main categories of ratios: performance ratios that indicate how well the business is being run and generating profits; financing ratios that assess the company's solvency and financial soundness; and investment ratios that are particularly relevant for shareholders and investors. Ratios should be tracked over multiple years and compared to industry averages and competitors to fully understand a company's financial health. Key financial statements used to calculate ratios are the profit and loss account and balance sheet.

1. 370 FinanceAction:
in Financial
Statements
a Performanca: successfully the business
How is beingrun asa tradingconcern? Here
we are concerned so muchwith profit aswitlr profitability.How well is the
not
company usingthe capitalit employs generate
to sales andin turn profits?
t Filtancinlstarrr: Is the gqqrpanysolvent*O tiqt qt.Is it financiallysound?
Tlie ratioscalculated eachofthesecategories
i! haverels'vance-foi differentstakehold-
ers. Shareholders, potentialinvestors, particularlyconcerned
and are wjth the invest-
ment ratios.Performance ratiostell the strategicleaderhowwell the company doing
is
as a busines. Bankersand other providersof loan capitalwill want to know that the
business solventand liquid in additionto howwell it is performing.
is
This form of analysis mostrelevantfor profit-seeking
is businesses,althoughsomeof
the measures provequite enlightening
can whenappliedto not-for-profitorganizations.
Ratiosarecalculated from thepublished accounts organizations, an analysis
of but of
just one setof resultswill only be partly helpfirl.Tiendsareparticularly important,and
thereforethe changes resultsover a numberof yearsshouldbe evaluated.
in Care
shouldbe takento ensurethat the resultsarenot considered isolationfrom external
in
trendsin the economy industry.For example, company's
or the salesmay be growing
quickly,but how do they compare with thoseof their competitors the industryasa
and
whole?Similarly,slow growth may be explained industrycontraction,althoughin
by
turn this might indicatethe needfor diversification.
Hence,industryaverages,and competitorperformance shouldbe usedfor compar-
isons.One problemhere is that different companies present
may their accounts dif-
in
ferent ways and the figures will have to be interpreted before any meaningful
comparisons be made.Furthermore, industry
can the maybe composed companies
of of
varyingsizes variousdegrees conglomeration diversification. this reason
and of and For
certaincompanies be expected behave
may to differentlyfrom their competitors.
In addition,it can be usefulto comparethe actualresultswith forecasts, although
thesewill not normallybe available peopleoutsidethe organization. usefulness
to The
is dependent howwell the forecasts budgets
on and wereprepared.
(
b
p
Financial
statements
The two most important statements
usedfor calculating ratios are the profit and loss
accountandthe balance sheet,simplifiedversions which are illustratedin Tables
of 7.6
and7.7,The full accountsmaybe requiredin order to makecertainadjustments. o
t
profit
Table Simptified andloss
7.6 account tr
h
5aleVturnover
less: Costs goods
of sold profit
Gross
lt
less: Depreciation
( pllinn r n< tc
i,
Administration
costs Profit
before interest tax*
and tl
reSs: lnterest loans
on Profit
before tax o
c
less: Tax Profit
aftertax (
less: Dividends Retainedearnings (transfened balance
to sheet)
*ln published
accounts figurewill
this not always shown.lt is required,
be however, the calculation certain
for of ratios.