How to Use Profitability Ratios to Make Investment Decisions
When considering a company as a prospective investment you should review its financial statements. Pay particular attention to the profitability ratios. If you can, calculate…
Accountancy Notes
Price to Earnings Ratio (P/E)
The price to earnings ratio, or P/E, is figured by dividing the stock price by the company’s earnings per share (EPS). The P/E is a…
Current Ratio
The current ratio provides an indication of how liquid a company may be in the coming year. To calculate it, take the current assets and…
Long-term Debt to Equity
The long-term debt to equity ratio can tell you how much debt a company is using to finance its operations. If this number is too…
Total Debt to Equity
Since companies can affect either the current ratio or the long-term debt to equity ratio by altering their mix of short-term and long-term debt, this…
Why will a business prefer to declare a high gross profit margin?
A business will want to declare a high gross margin as it will mean that the gap between its costs and revenues/prices remains healthy. This…
What should the ROCE figure be compared with when analysing a company’s results?
They should be looked at against previous years results, the results of major rivals, the current rates of interest and returns on alternative investments and…
Explain the relevance to a company of declaring a net profit margin that is not a great deal lower that its gross margin.
This ratio measures the relationship between the net profit declared and the sales or turnover of the company. If is quite close to the gross…
How might a company boost its profitability?
To boost profitability a company will basically either (a) cut costs or (b) increase revenue. To do the former they will need to look for…
Business entity convention
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner’s personal transactions. For legal purposes, a sole proprietorship…