Learn How To Analyze A Financial Statement

Its obvious that financial statement has a lot of numbers in them. To compute ratios is one way to interpret a financial report, which means, divide a particular number in the financial report by another. Financial statement ratios are also useful because they enable the reader to compare a business's current performance with its past performance. In other words, using ratios can cancel out difference in company sizes.

There aren't many ratios in financial reports. Publicly owned businesses are required to report just one ratio (earnings per share, or EPS) and privately-owned businesses generally don't report any ratios. Generally accepted accounting principles (GAAP) don't require that any ratios be reported, except EPS for publicly owned companies.

Ratios don't provide definitive answers. They're useful indicators, but aren't the only factor in gauging the profitability and effectiveness of a company.

One ratio that's a useful indicator of a company's profitability is the gross margin ratio. This is the gross margin divided by the sales revenue. Businesses do not disclose margin information in their external financial reports.

In analyzing the bottom-line of a company the profit ratio is very important. A profit ratio of 5 to 10 percent is common in most industries.