Question

Explain the firm’s four key ratios as a predictor of sustainable growth.

Answer 1

Sales Growth rate = (Sales of existing year - Sales of Previous Year)* 100 / Sales of Previous Year
This ratio helps in understanding the growth in sales. If there is decrease the firm can try to increase price per unit or increase the unit sales through marketing and trade promotions.

Net Profit Margin = Net Income / Sales
This ratio provides information about the net profit margin . If the net profit margin is less the company can focus on reducing expenses like operating expenses , reducing interest( which can be reduced by reducing loan amount or restructuring loans to lower interest rates. It can be enhanced by increasing sales too by increasing price per unit)

Return on Assets = Net Income/ Total assets
This indicates the efficiency in utilization of assets and comparing with similar industry. Low Return on assets means the company is not effectively using its assets.

Return On Equity = Net Income/ Equity
This is highly important for equity holders or investors. Higher Roe alsways attracts investors and is an indicator of sustainable grwoth
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