Unit 5 M2

1121 Words5 Pages
Analyze the performance of a business using suitable ratios for 2006 and 2007 Ratio analyses; Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios. Ratio Analysis as a tool possesses several important features. The data, which are provided by financial statements, are readily available. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm's performance and to identify areas which need to be investigated further Profitability. The net profit percentage shows the amount of money the business earns before the tax and the bills have been paid. This is useful because the company knows the amount of money they have before paying taxes and bills. To calculate this responsible has to calculate the net profit dived by the turnover and then times it by 100. FORMULA: (net profit/ turnover) x 100. This will show the total percentage of the business. Example for Harvey and company limited the net profit for 2006 is 14.8% and the net profit for 2007 is 14.3%, the net profit percentage from 2006 to 2007 has decrease by 0.5 %, which is not good for
Open Document