Clearly, read audited financial statements have many numbers in them and at first glance it may seem clumsy to read and understand. One way to interpret the financial report is to calculate the ratios, which means to divide a specific number in the financial report of another. The ratios of the financial statement are also useful as they allow the reader to compare the current performance of the business with its past or with the performance of another enterprise, regardless of whether the revenue from the sale or net income was greater or smaller for the other years or other business. In the order of the words, using the ratios can cancel the difference in the size of the enterprise.
There are not many proportions in the accounting reports. Publicly owned businesses are required to report only one ratio (earnings per share, or EPS) and privately-owned businesses generally do not report any ratios. Generally accepted accounting principles (GAAP) do not require any ratios to be recognised in addition to the EPS for publicly owned companies.
The ratios do not provide definite answers, however. These are useful indicators, but are not the only factor in measuring the profitability and efficiency of the company.
One of the ratios that is a useful indicator of company profitability is the gross margin ratio. This is the gross margin divided by sales sales. Businesses do not have the disco margin information in their external financial reports. This information is considered to be of a proprietary nature and is secret to protect it from competitors.
The profit ratio is very important in analyzing the Bottom-line company. This indicates how much net income has been earned on every $100 of the sales revenue. The profit ratio of 5 to 10 percent is common in most industries, although some highly competitive-priced industries such as retailers or grocery stores will show profit ratios of only 1 to 2 percent.
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