Response – Profitability Ratios

Response – Profitability Ratios

Responding to Yumeaka

Jackson,

I like your post already and would like to add to these profitability ratios. The gross margin ratio is achieved by dividing the gross profit by the net sales. This shows the amount of money that remains after the cost of sold goods is paid. The operating margin ratio is obtained by dividing the operating income by the net sales. Other ratios include return on assets and return on equity. All these ratios assess the company’s ability to yield income while considering revenue, equity, and operating costs, as well as the balance sheet assets (CFI Education Inc., 2022). As you have explained, leverage ratios enable the assessment of whether a business can meet its long-term debt obligations. Debts are an important aspect of business because they facilitate expansion, diversification, and other activities. However, a business should be capable of servicing these debts through the returns that are gained from business transactions. This significantly secures the business’s future.

Reference

CFI Education Inc. (2022). Ratio Analysis.

Responding to Luis Ramos

Ramos,

I like the format that you have used in your post. I would like to add some of the ratios that fall within the three categories. The profitability ratios include gross margin ratio, operating margin ratio, return on assets ratio, and return on equity ratio (Abdullah, 2021). The debt or leverage ratios include debt ratio, debt to equity ratio, interest coverage ratio, and debt service coverage ratio. The efficiency ratios include asset turnover ratio, inventory turnover ratio, receivables turnover ratio, and day sales in inventory ratio. Each of these ratio categories affects the decisions that are made in every business. Based on the figures that are obtained from the calculations, the business managers can make appropriate decisions on the best action in the future.

Reference

Abdullah, C. (2021). The Efficiency Of Financial Ratios Analysis To Evaluate Company’s Profitability. Journal of Global Economics and Business, 2(4), 119-132.

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Response – Profitability Ratios

Yumeaka
The three main categories of ratios are profitability, leverage, and liquidity. These Financial ratios are used to determine how a business is financed. Profitability Ratios are used to measure how profitable the business’s activities are. If the products and services of that business are generating a profit once expenses are paid, then that’s considered the contribution margin ratio, and the net profit ratio is the remaining amount of profit once taxes and all costs/expenses have been accounted for. Leverage ratio is a business way of making sure they meet their long-term debt obligations on the balance sheet in the form of pension funds, long-term loans, or payable bonds. This debt-to-equity ratio is the amount of retained earnings that is invested back into the company. A good debt-to-equity ratio is typically between 1.0 and 1.5; anything higher is considered rather risky. Whereas a negative debt-to-equity ratio usually means that a particular business is near bankruptcy. Lastly is the Liquidity ratio, which primarily focuses on the business’s ability to pay its short-term debt almost instantly. This includes the business’s current cash flow & inventory minus current assets, all of which can be calculated using your balance sheet. A debt-to-equity ratio is a good tool in assisting in the managerial decision-making process, as it helps to form a clear vision of the company’s financial performance and ability to pay its debt obligations, whether long-term or short-term. Knowing this information upfront can be the deciding factor of whether it’s a good time to expand the business, cut back on expenses, or make changes entirely.
CARLSON, ROSEMARY (2019). The Balance Small
Business. https://www.thebalancesmb.com/categories-of-financial-ratios-393217

Hi Class,
Luis
The financial ratios of management or activity serve to detect the effectiveness and efficiency of the management of the company. That is, how the company’s management policies related to cash sales, total sales, collections, and inventory management worked.
Managerial decision-making: Evaluate the amount of cash transactions made to buy materials compared to the inventory not selling.
Profitability ratios are the ones that measure the performance of a company in relation to its sales, assets, or capital. This ratio is used to measure how profitable the capital contributed by the shareholders is, as well as the capital generated by the company itself.
Managerial decision-making: Evaluate last quarter’s profit margins and create a forecast for the quarterly budget.
Debt or leverage ratios provide information about a company’s level of indebtedness in relation to its net worth.
Managerial decision-making: Review how much debt the company had in the last year and how the debt can decrease quarterly using a specific strategy
These three ratios are the ones that most companies use regularly. With them, they can analyze the economic and financial behavior of the business, simplify decision-making, and improve suggestions.