Significance of Financial Ratios in Evaluating the Financial Performance of a Company

Quality and Price RatioFinancial ratios are considered to be the best tool for evaluating the financial performance of a company. Different financial ratios highlight different aspects of the financial performance of a company. Following is a brief introduction to the ratios that are used in ratio analysis.

Profitability Ratios

Stakeholders of the company are interested in the profitability of the company because the dividend payout depends upon the profit of the company. Therefore, in order to decide whether to continue the investment in a company the stakeholders of the company consider whether they are being benefited by the company.

Gross Profit Margin

Formula:

Gross Profit Margin = Gross Profit/ Total Revenue

Gross profit margin helps the users of the financial statements assess the ability of the company to maintain an efficient difference between the total revenue and the production cost. This ratio indicates whether the company maintains a healthy margin over the sale of its products or services, and whether the cost of production of the company is reasonably low or unacceptably high. Continue reading