Appendix I
Review Exercise Solutions
434
Appendix II
Summary of Financial Ratios
The following is a guide to some common ratios used
to measure the financial performance of a business.
Different industries have different benchmarks for
each ratio. It is important to understand the trends
in a company’s performance from period-to-period
and the relative performance of a company within its
industry for each ratio.
Working Capital
Corrent Assets - Liabilities
Represents the excess dollar amount of current
assets available after paying current liabilities.
Gross Profit Margin
Gross Profit
Sales Revenue
Measures the percentage of revenue remaining
to contribute towards operating expenses, after
deducting product costs per dollar of revenue.
The higher the percentage, the higher the contri-
bution per dollar of revenue.
Net Profit Margin
Net Income
Sales Revenue
Represents the profitability and efficiency of the
business. Generally, the higher the percentage,
the better because it indicates efficient manage-
ment and expense control.
Return on Equity (ROE)
Net Income
Average Shareholders’ Equity
Tests the financial return the owners of a busi-
ness are earning, relative to their investment.
Generally, the higher the percentage, the better.
Use this ratio to assess risk and reward.
I
