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Financial Statement and Ratio Analysis

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Course Code/Name

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Profitability Ratio and Its Use

Financial statement analysis involves understanding the risk and profitability of a given company

by assessing financial information, for example, the quarterly and annual financial reports.

Among the ratios that I will discuss in my paper is the profitability ratio. Profitability ratios

analyze a company's capability to generate profit in relation to operating costs, shareholders'

equity, sales revenue, and balance sheet assets. Four metrics can measure profitability ratios; the

operating margin, return on equity, total profit margin, and assets return (Husain & Sunardi,

2020).

Profitability ratios can be used to attract potential investors into a company. Investors usually

analyze a company's financial statements to determine if it has the potential to generate a

substantial profit before they decide to invest (Husain & Sunardi, 2020). Besides, profitability

ratios can compare a company's performance to its competitors (Husain & Sunardi, 2020). The

comparison can reveal one's performance in the market; making less money than another

company does not mean that one's startup is less profitable. Profitability ratios can be used to

reveal the areas in an organization that need more work and attention by analyzing the business's

efficiency in given regions (Husain & Sunardi, 2020).

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References

Husain, T., & Sunardi, N. (2020). Firm's Value Prediction Based on Profitability Ratios and

Dividend Policy. Finance & Economics Review, 2(2), 13-26.