ACC 406 Lecture : ratios.doc

• School: Ryerson University
• Department: Accounting
• Course: ACC 406
• Professor: Anthony Chen

Document Summary

In our introduction to interpreting financial information we identified five main areas for investigation of accounting information. The use of ratio analysis in each of these areas is introduced below: These ratios tell us whether a business is making profits - and if so whether at an acceptable rate. Net profit before tax, interest and dividends (ebit) / total assets (or total assets less current liabilities. This ratio tells us something about the business"s ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. Whilst sales value and volumes may move up and down significantly, the gross profit margin is usually quite stable (in percentage terms). However, a small increase (or decrease) in profit margin, however caused can produce a substantial change in overall profits. Assuming a constant gross profit margin, the operating profit margin tells us something about a company"s ability to control its other operating costs or overheads.