Question

In: Accounting

How to compare two company's products differently by using the relevant financial statement ratio? And find...

How to compare two company's products differently by using the relevant financial statement ratio?

And find out Which company’s product offerings are more differentiated?

You just need to tell me how to use the financial statement to answer this question.

Solutions

Expert Solution

Financial Statement Ratios are used by the management of the company in order to compare the two company's

products differently as well to find out which company's product are more differentiated and accordingly to take

corrective measures, if required, and also to draw the future course of action to be taken.

For this purpose profitability ratios of the company is evaluated or analysed to find out the impact of profit on

revenue and capital employed of the company, viz.,

1) Gross Profit Ratio = Gross ProfIt / Net Revenue from * 100

This ratio find outs the percentage of Gross Profit earned by company and accordingly higher the percentage

is better.

2) Net Profit Ratio = Net Profit / Net Revemue * 100

This ratio find outs the percentage of Net Profit earned by company and accordingly higher the percentag

is better.

3) Operating Profit Ratio = Operating profit / Net Revenue * 100

This ratio find outs the percentage operating profit of the company and accordingly higher the percentage

is better. Operating Profit = Net profit - Non Operating Expenses + Non Operating Incomes.

4) Operating Ratio = Cost of Goods Sold + Operating Expenses / Net Revenue * 100.

  Cost of Goods Sold = Opening Inventory + Net Purchases + Direct Expenses (If Any) - Closing inventory.

5) Return on Shareholder's Fund = Profit after Taax (PAT) - Preference Share Dividend (If Any) / Shareholder's fund

* 100.

This ratio measures the profit percentage available for equity shareholder's upon the shareholder's fund.

6) Return on Capital Employed = Earning before Interest and Tax (EBIT) / Capital Employed * 100.

Hence, the above ratios are calculated or analysed by the company for comparing the two company's products

differently and by this manner financial statement to be used.

  

ekkarill92 answered 1 year ago
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