FINANCIAL STATEMENT RATIO ANALYSIS CASE Study Example | Topics and Well Written Essays - 1750 words

FINANCIAL STATEMENT RATIO ANALYSIS - Case Study Example Financial ratio analysis is the calculation of harmonized relationship of figures that appear in the financial statements. These relationships are known as ratios and they are very useful in analyzing the financial performance and financial position of a business. The financial ratios enhance the comparison of different companies in the same industry since the financial statements alone cannot play this role due to the difference in size of businesses. These ratios measure the ability of a firm to make profit to its owners. They indicate the financial performance of a firm. The main profitability ratios are net profit margin, operating profit margin and gross profit margin. The calculation of net profit margin is (net profit/ sales) * 100%. The calculation of operating profit margin is: (operating profit margin/sales) * 100%. The calculation of the gross profit margin is (gross profit margin/ sales) * 100% (Bragg 54). These ratios indicate the level of efficiency in a business. The main management ratios are return on equity, return on assets and the inventory turnover. The calculation of return on equity is (net profit/ total equity) * 100%. The calculation of return in assets is (net profit / total assets * 100%). The calculation of inventory turnover is (inventory/ sales) * 100% (Bull 87). These ratios indicate the ability of a firm to finance its current debts using its current assets. The main liquidity ratios include; quick ratio, current ratio and the net working capital. The calculation of the current ratio is current assets/ current liabilities. The calculation of the quick ratio is (current assets - inventory) / current liabilities. The calculation of the net working capital is current assets – current liabilities. These ratios measure the going concern or the viability of a firm and its ability to meet its long-term debts. The main