Calculating Financial Ratios Profitability Ratios

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In addition to vertical and horizontal analysis of financial statements, managers, creditors, and investors also study comparisons among various components on the statements. These comparisons are expressed as ratios and are known as financial ratios. Profitability ratios tell how much of each dollar of sales, assets, and stockholders’ investment resulted in bottom-line net profit.

The profitability ratios are important to anyone whose economic interests are tied to the long-range success of the firm. Investors expect a return on their investment in the form of dividends and stock price appreciation. Without adequate profits, firms quickly fall out of favor with current and future investors.
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