A ratio is calculated by dividing one item by another—for example, profit divided by turnover. However, you should not pick items from financial statements at random and divide them; you should select items whose ratio will be meaningful and provide information that will aid decision-making. In the example of profit divided by turnover, this ratio, otherwise called the profit margin, tells you how much profit is generated for every Naira of turnover.
Ratios are usually expressed as percentages, but also as percentages as they apply to times or days. A profit margin of 20% means that after all relevant deductions, the company retains 20% of its turnover as profit. In other words, the profit for the period is 20% of the turnover. The ratios on their own are useful in directing the attention of management and section...