Profitability ratios in financial ratio analysis Essay

Profitability ratios in financial ratio analysis - Essay Example Ratio Analysis is a popular technique which helps in analysing a company’s performance over a given period of time.Although this technique has some limitations, it is broadly used around the world in analysing the performance of different organisationsAs per the Income Statement and the Balance Sheet, the company seems to be a very good profitable organisation but a mere look upon these two financial statements do not give a decisive position about a company’s performance, hence proper analysis needs to be done. Ratio Analysis is one of the popular technique which helps in analysing a company’s performance over a given period of time. Although this technique has some limitations, it is broadly used around the world in analysing the performance of different organisations around the world. The performance of Uffington Plc is analysed by using the ratio analysis technique. The ratio analysis uses different types of ratio which are based upon different aspects of per formance in a company and finally a company’s performance is evaluated under all those different ratios.â€Å"Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm's ability to translate sales pounds into profits at various stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders† (About.com).... The ratio analysis uses different types of ratio which are based upon different aspects of performance in a company and finally a company’s performance is evaluated under all those different ratios. â€Å"Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm's ability to translate sales pounds into profits at various stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders† (About.com). Gross Profit Margin ratio is a profitability ratio which reveals the amount of gross profit as a percentage of the sales revenue. Uffington plc’s Gross Profit Margin has improved from 30% in 2008 to 35% in 2009. This indicates that the company has improved its performance during the year 2009 but if these results are compared with the indus try average trends for Uffington plc, the company has not performed although the company is trying to achieve the industry average gross profit margin of 50%. Uffington plc would need to increase its revenue or cut its costs dramatically to reach the industry average gross profit margin of 50%. Liquidity ratios are a measure of ascertaining the day to day running of a company; it is merely a measure of ascertaining a company’s ability to pay off its obligations as they fall due. These obligations are generally the current liabilities and these current liabilities can be met by having appropriate current assets. The current ratio is a measure that analyses a company’s ability to pay off its current liabilities by negotiating its current assets. Uffington plc