While analysing financial statements, it is best to reduce amount comparisons to percentages or to ratios so that you have an easy way to judge those comparisons. And if you compare those ratio results with what you know to be good, fair or bad, you have a way of determining the health of a business. Simply put, under ratio analysis, amount comparisons are changed to ratios and then these ratios are compared to a known standard. It is important to note that ratio analysis cannot be taken in isolation from other aspects of business. One must consider what type of business it is.
Turnover ratios show how frequently the assets are converted into sales.
This ratio is the percentage of sales money left after subtracting the cost of goods sold from net sales. This ratio indicates the margin left after having met the cost of production. This ratio is the percentage of sales money left after subtracting the cost of goods sold and all expenses, except income taxes. It provides a good measure of operating efficiency of the business. Interest is a finance charge while tax may vary from firm to firm.