ABSTRACT
After you have studied the diagram showing the ‘pyramid’ of ratios, and noted the links between various parts, the next step is to calculate a set of financial ratios for yourself.
When approaching the detailed ratio analysis of a company’s accounts, it is helpful to group the ratios under three broad headings to measure different facets of the business:
We deal with performance ratios in this section, and with the other ratios in Section 3. The full list of performance ratios which we shall define and use in this section is set out below:
Profitability Asset turnover Return on net assets (%) Net asset turnover Profit margin (%) Fixed asset turnover Return on equity (%) Stock turnover Tax ratio (%) Debtor turnover
The first four ratios above relate to profitability, and the second four relate to sales divided by assets. These two kinds of measures are intended to help show how well a business is being run.
