Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University inventory or capital assets)are sometimes far more significant than large changes in small accounts(such as prepaid), which can be volatile Horizontal analysis on an income statement indicates sales trends and the behaviour of the various expense components over time. The trends in these percentages may reveal significant insights into the strategy and efficiency of the operation The profit margin on sales percentage(a ratio in its own right) is especially important due to the size of the cost of goods sold expense category and its vulnerability to operating inefficiencies and competitive forces. a slippage of 1%or 2%, or even. 1%, in gross profit can make a large difference to returns earnec Ratio analysis Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. Ratio analysis is very useful for users of financial statement information, for example They facilitate inter-company comparison They downplay the impact of size and allow evaluation over time or across entities without undue concern for the effects of size differenc They serve as benchmarks for targets such as financing ratios and debt burden They help provide an informed basis for making investment-related decisions by comparing an entity' s financial performance to another classifies ratios into five analytical groups, which are Profitability analysis ratios, which show how successful a company is in terms of generating returns or profits on the Investment that it has made in the business. If a business is Liquid and Efficient it should also be Profitable Main profitability analysis ratios Return on Sales or Profit Margin (%) The Profit Margin of a company determines its ability to withstand competition and adverse conditions like rising costs, falling prices or declining les in the future. The ratio measures the percentage of profits earned per dollar of sales and thus is a measure of efficiency of the company Return on Sales or Profit Margin=(Net Profit/Net Sales)x 100 Return on Assets: The Return on Assets of a company determines its ability to utilize Assets employed in the company efficiently and effectively to earn a good return The ratio measures the percentage of profits earned per dollar of Asset and thus is a measure of efficiency ofTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University inventory or capital assets) are sometimes far more significant than large changes in small accounts (such as prepaids), which can be volatile. Horizontal analysis on an income statement indicates sales trends and the behaviour of the various expense components over time. The trends in these percentages may reveal significant insights into the strategy and efficiency of the operation. The profit margin on sales percentage (a ratio in its own right) is especially important due to the size of the cost of goods sold expense category and its vulnerability to operating inefficiencies and competitive forces. A slippage of 1% or 2%, or even 0.1%, in gross profit can make a large difference to returns earned. Ratio analysis Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. Ratio analysis is very useful for users of financial statement information, for example: They facilitate inter-company comparison; They downplay the impact of size and allow evaluation over time or across entities without undue concern for the effects of size difference; They serve as benchmarks for targets such as financing ratios and debt burden; They help provide an informed basis for making investment-related decisions by comparing an entity’s financial performance to another. This lesson classifies ratios into five analytical groups, which are: Profitability analysis ratios, which show how successful a company is in terms of generating returns or profits on the Investment that it has made in the business. If a business is Liquid and Efficient it should also be Profitable. Main profitability analysis ratios: Return on Sales or Profit Margin (%): The Profit Margin of a company determines its ability to withstand competition and adverse conditions like rising costs, falling prices or declining sales in the future. The ratio measures the percentage of profits earned per dollar of sales and thus is a measure of efficiency of the company. The formula: Return on Sales or Profit Margin = (Net Profit / Net Sales) x 100 Return on Assets: The Return on Assets of a company determines its ability to utilize the Assets employed in the company efficiently and effectively to earn a good return. The ratio measures the percentage of profits earned per dollar of Asset and thus is a measure of efficiency of