Ratio analysis for stock selection is the process that can be performed step by step for the selection of stock, so many steps follow, such as financial analysis. Income statement analysis is which includes profit and loss, balance sheet analysis, and cash flow analysis. Among these steps, one of the important analyses is ratio analysis.
Now, understand how ratios are interpreted. We start with the profitability ratio, these are categorized in the following way
1) Profitability ratio
a) Profit margin -> Profit margin ratio shows how much profit is generated from our sales profit from the business is primarily function. The profit margin ratio shows how much profit from the business is primarily a function.
b) Profit margin Net income/sales revenue. For example, if you have a profit margin, it means 72% of sales revenue ends up with 22% profit, and the remaining 78% is used up as expenses over a period. If the profit margin changes, what will happen?
If the Profit margin ratio changes over time, what does it mean? If it rises, it means our research expenses have fallen in sales. Another reason could be selling a product at a higher price without increasing cost.
c)Gross profit margin ratio is a very important calculation, particularly in relation or manufacturing entities it is sales revenue less cost of sales the profit it measures every dollar of sales revenue that remains after the cost of purchasing or
manufacturing the inventory.
It is a very important ratio for both investors and businesses. It tells how much funds are left from sales revenue to pay all remaining expenses. When the Gross profit margin is 35, this means that your sales revenue is left to pay your remaining expenses and left for net profit. Every business wants a higher Gross profit margin. There are a number of reasons.
1)Final selling prices may be increased to the cost of inventory.
2)Return on assets – Return on assets is one of the most valuable ratios that analyze its present profits, it is measured as a percentage of the average level of assets, it is telling as in the return generated by the assets of the business for those who have funded the assets these being the stockholders and creditors. It is a great indicator to show how many investors can take profit from investing in assets in any business it is a great insight into the success of management to those who fund or own, A normal life cycle of a business is
a) it raises fund
b) invest in assets in assets
c) Make a Return on those assets
d)give back the Return to those who funded the assets
formula- income before tax+investment expenses /Assets start period +Assests end period
what it means if the return on assets changes
increasing return on assets means it means your profitability increases in return to your level of assets. The reason for increasing assets could be reducing expenses or increasing revenue. Another lesson that could be permanent is improving their performance. Their decision result in getting more or less at least more returns for the same inputs.
3) Return on equity- Return on equity is similar to return on assets; return on equity is a simple measure of performance over time and between businesses.
There is also a key relationship between return on assets and return on equity. If the return on equity is higher than the return on assets and return on equity. If the return on equity is higher, then the return on assets means the business is generating higher return leverage or gearing is using borrowed fund level your result.
formula=Return on equity =Net income-preference dividend/Common stockholder equity
at start of period/2
if the return on equity changes, it is a very good sign. It shows management has improved the performance of the business on behalf of the stockholders. Return on equity decreases if liability increases. This can be done by pulling all income experts or credit. This reduces equity and increases liabilities. Deliberately with a corresponding decrease in equity. This reduces equity and increases liabilities. Credit bank overdrafts there with an equal profit as the previous period. There, with an equal profit as the previous period, the reduced equity will have the effect of increasing the return on must be explained.
If the return on equity is higher than the return on assets, then the new increased level of liabilities is being managed well.