Business Revision - Finance

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Profitabilty Ratios

Benefits/Advantages of these Ratios:

  • Profitabilty ration will show you how profitable a business is
  • They are a measure of overall performance
  • They can be used to examine how well a business is operating
  • Profitability rations can be used to compare and contrast current perfomance to past perfomance - an increase in the ratios is viewed as a positive trend

Drawbacks/Disadvantages of using these Ratios:

  • Ratios will not tell a business what is going right or wrong
  • Ratios are useless in isolation
  • Ratios relate to a particular point in time
  • Ratios need to be compared over a period of time to identify trends
  • Ratios are only as reliable as the information/data used to calculate them
  • Ratios relate to the past and not the future
  • Levels of customers may vary at the business - there may be busy/quiet periods
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