The paper "Financial Ratios of Prolong Ltd " is a perfect example of a finance and accounting case study. We want to use the liquidity, profitability, efficiency and financial stability ratios to ascertain on whether there is any growth in the business by analyzing the trends over time. These ratios are useful in determining the firm’ s performance and its financial position. Profitability ratios The gross profit margin measures the gross profit earned on sales and takes into consideration the cost of goods sold by the firm (Birt and Gregory, 2010). The other costs are meaningless in calculating the gross profit margin.
The formula below represents the gross profit margin: Gross profit margin = (sales – the cost of sales)/ sales 2010 2009 Sales 1,200,000 1,180,000 cost of sales 750,000 680,000 Gross profit 450,000 500,000 Gross profit margin 0.38 0.42 The net profit margin measures the net profit earned on sales and takes into consideration all the costs the firm incurs. 2010 2009 Sales 1,200,000 1,180,000 Net profit 159,000 234,000 Net profit margin 0.13 0.20 Return on equity is used to measure the shareholder's wealth by determining the profits earned for each dollar that has been invested in the firm’ s stock. It is given by the formula below: Return on equity = Net income/ shareholders equity 2010 2009 net income 39,000 84,000 shareholders equity 1,083,000 984,000 Return on equity 0.04 0.09 Return on assets measures how efficiently a firm utilizes its asset in generating profits and it's determined by the formula below: Return on assets = Net income/ Total assets 2010 2009 net income 39,000 84,000 shareholders equity 845,000 756,000 Return on assets 0.046 0.11 Looking at the above-calculated ratios, the gross profit margin has slightly declined from 0.42 to 0.38.
This may be as a result of the purchases on vehicles, fixtures and furniture’ s made during the year. There is also a slight decline in the net profit ratio from 0.20 to 0.13 and this may be as a result of the extra costs the firm incurred during the year.
The return on assets has decreased from0.11 to 0.046 while the return on equity has also decreased from 0.09 to 0.04. The differences are because of the reduced net income from 84,000 to 39,000.
ReferenceBirt and Gregory Boland (2010). Accounting: Business Reporting for Decision Making. Wiley and sons publishers.