There are thousands of ratios, and you could easily get carried away with them. To make life easier for us, ratios can be classified under five broad categories—namely, profitability, liquidity, efficiency, debt management, and market ratios.
We will examine a few examples for each of these categories.
These ratios measure how capable a company is of converting turnover into profit. These ratios are usually referred to as the margin, which generally means that they are divided by turnover. Let's look at the gross profit margin, which is expressed as the following formula:
Here, the gross profit is the turnover less the cost of sales.
Sometimes, when a company makes a loss, you can still take some comfort if there is a gross profit. This means that the direct costs have been covered and there is some contribution towards...