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Profitability Ratios
Introduction:
Profitability is the efficiency with which management has utilized both the total assets and the net assets as recorded on the balance sheet to generate earnings. This efficiency is measured by relating net profit to the assets and resources utilized in generating that profit.
Beside effectiveness profitability also reflects the ability of a firm’s management to generate profit on sales, assets, and mainly on stockholders investment.
In general I can emphasize that profitability will assist in measuring and valuing the management efficiency to make investment and financial decision.
Ratio Analysis:
John Wild, Subramanyam, F Halsey (2007) define ratio as an arithmetical relation of two quantities; however its function as an analysis tool will depend on a competent application and interpretation. There are many factors affecting ratios such as economic, industry factors, management policies and accounting methods. Analysis of accounting methods is a crucial part for proper ratio analysis, because by accounting analysis and scrutiny we ensure the accuracy and relevance of ratio components.
Ratios as an analysis technique are not useful if taken in isolation, however they are useful when interpreted in comparison to prior ratios, industry predetermined standards and competitors ratios. When using ratios care should be taken to factors affecting both the numerator and the denominator, for instance reducing some operating costs will enhance earnings on the short run, but on the other hand reducing these costs may ...