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Ratio Analysis of Financial Statements - Case Study Example

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This paper "Ratio Analysis of Financial Statements" discusses the system of ratio analysis that has been adopted for purposes of such analysis. Ratios have been calculated on the basis of extract of information from the final accounts of Maclnray’s Mint Limited…
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Ratio Analysis of Financial Statements
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Download file to see previous pages In the second part of the write up a comparison between trading sole proprietor and company’s year-end accounting has been described.
Profit Ratio “measures the percentage of each sales dollar remaining after the firm has paid for its goods. The higher the gross profit margin, the better, and the lower the relative cost of merchandise sold.” (Lawrence. J. Gitman, 2000).

Operating profit margin is “measurement of management’s efficiency. It compares the quality of a company’s operations to its competitors. A business that has a higher operating margin than its industry’s average tends to have lower fixed costs and a better gross margin, which gives management more flexibility in determining prices. This pricing facility provides an added measure of safety during tough economic times.” (Investing for beginners) In fact, operating margin reflects the management cost efficiency with regard to the overhead expenditure.

Return on Total Assets is designed to effectiveness with which total assets of the company are utilized for its operational activities. Return on Total assets. Its calculations involve the use of profits before interest and taxes in order to match total assets performance only operational results. This is because interest and taxes are decisions that are taken by the management keeping the overall long-run perspective of the company in view.

Return on Equity (ROE) can be used to judge profitability, asset management, and financial leverage of the company. From the profitability point of view, ROE explains how efficiently the capital of the company has been employed to earn its profits. “This ratio indicates how profitable a company is by comparing its net income to its average shareholder's equity. The ROE measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and better returns to its investors.” (Richard Loath) ...Download file to see next pagesRead More
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