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ACC 406 (255)
Lecture

ratios.doc

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Department
Accounting
Course
ACC 406
Professor
Anthony Chen
Semester
Fall

Description
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 Profitability Ratios These ratios tell us whether a business is making profitsand if so whether at an acceptable rate The key ratios are Ratio Calculation Comments Gross Gross ProfitThis ratio tells us something about the businesss ability Profit Revenue x 100 consistently to control its production costs or to manage the Margin expressed as a margins its makes on products its buys and sells Whilst sales percentage 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 Operating Operating ProfitAssuming a constant gross profit margin the operating Profit Revenue x 100 profit margin tells us something about a companys ability to Margin expressed as a control its other operating costs or overheads percentage Return on Net profit before tax ROCE is sometimes referred to as the primary ratio it tells capital interest and dividends us what returns management has made on the resources employed EBITtotal assets made available to them before making any distribution
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