Part 3 of 3-Part Series
Since there are many profitability ratios, they target many different areas of the business and the more insight you have, the better you can run the company. The ratios will show which parts of the business are not running financially efficient and need work. Financial statements are the basis of any business management, but they do not show the same amount of information that the ratios can show.
Lastly, it is vital to understand where your business stands in relation to other companies in the same industry. While you may think it is easy to just compare the absolute profit or revenue, this does not take into consideration the different stages companies may be in. If you are a startup or a fairly new business, it stands to reason that your profit will not be as large as more established companies. That is where the ratios come in, because they are in essence percentages rather than absolute values. By comparing percentages to other industry companies, you get a good understanding of how your company is doing. By using a ratio, you understand that your company can be just as profitable even if it making less money.
Our formula is a nice simple formula which gives an understandable number to define profit margin ratio, but as mentioned before, this is just a snapshot from an entire video. To fully understand the company’s workings and how it is truly doing, all of the other formulas are often used in conjunction with this one. Additionally they should be used on a regular basis to really make use of the insight they can provide.