Calculate and interpret financial ratios from financial statements Essay

Calculate and interpret financial ratios from financial statements - Essay ExampleIn addition, you can enjoyment these ratios to compare the performance of your follow against that of your competitors or other members of your industry. (Alex Auerbach)When you take profit before tax or interest (EBIT) and divide it by the difference between total summations and current liabilities, you can get a financial ratio known as furnish on capital employed ratio or ROCE. It is a ratio that shows the companys capital investments profitability and efficiency. The ROCE ratio is a measure of how well a company is using capital to generate income. A graduate(prenominal) ROCE is a sign or a no-hit growth company and indicates that a larger mass of proceeds can be reinvested to gain much profit. However one year ROCE evaluation should not be the basis for reinvesting. Investors should look closely on the trend over several years to have consistency. A sudden decline in ROCE signals a loss of c ompetitive advantage.Asset Turnover Ratio specifies the connection between assets and revenue (Revenue/Total assets). It gauges a companys efficiency in using its resources in making sales. A higher asset Turnover is better. It also specifies pricing strategy companies with low profit margins are inclined to have high asset turnover, whereas those with high profit margins tend to have low asset turnover. This ratio is important to regulate on the amount of sales that are produced from each dollar of assets.To evaluate a companys operational efficiency, return on sales ratio is used. ROS is also recognized as a companys direct profit margin. It is calculated using this formula Net Income before interest and tax divided up by sales. Investopedia says This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many an(prenominal) ratios, it is best to compare a companys ROS over time to look for trends, and compare it to other companies in the industry. An increase ROS indicates the