Importance Of Ratio Analysis For Business
Ratio analysis is a financial statement which provides the business with detail information and data on the business. Ratio analysis can help businesses such as it can benefit them by analysing their financial health or firmness and progression of their business. There are three types of ratio analysis and there are Profitability ratios, Liquidity ratios and Efficiency ratios. These are the different types of ratio analysis and they recognise characteristics of a business performance. On the other hand, quantitative and qualitative are also part of ratio analysis as they help businesses by getting a complete outline of their business. Quantitative is mainly facts and figures whereas qualitative is opinions and views.
Profitability ratio is when it measures how much a business generates profit through its activities. In this ratio, there are three main ratios which are used to measure the success of a business. The three ratios are;
1.
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Gross Profit Margin: this margin measures the gross profit of a business as a percentage of sales revenue. The formulae for this ratio is Gross Profit/Sales revenue X 100 = Gross Profit Margin. On the other hand, this profit margin is supposed to be high to leave the business with more profit where they can cover their business expenses. This profit margin can be improved where the business can generate more percentage of profit by increasing the sales revenue or decreasing COGS (cost of goods sold). By doing this it would allow the business to produce high level of gross profit margin.
2. Net Profit Margin: this margin measures a business net profit as a percentage of sales revenue. The formulae for this margin is Net Profit/Sales revenue X 100 = Net Profit Margin. This margin can be improved by increasing sales revenue or decreasing the cost of sales and business expenses which can lead to a higher percentage of net profit
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