it by your firm’s sales amount. To go back to our income-before-tax example, if a company’s income before taxes is $500,000 and their annual sales were $6,000,000, their ratio is 0.083 or 8.3%—a profit- leading company according to the example from before.

Analysis of Ratios Although no single ratio by itself is enough to change management policies or operating procedures, analysis and comparison to other financial indicators may point to deviations from goals or expectations.

Individual ratio results may pinpoint a problem area in your operation or even highlight a profitable cost center, but individual ratio results don’t provide in- depth financial information. Each should be analyzed with other ratios and facts concerning your company.

For example, in examining your firm’s income state- ment, you may find increases in your percentages for depreciation expense and interest expense—increases that may seem alarming at first. An analysis of the balance sheet, however, may show that such alarm is unwarranted.

Top management may have long-range profit planning goals that should be factored into the analysis. There may have been a plant expansion (increase in assets) funded through debt financing (increase in liabilities). A slow, outdated press may have been replaced by a new, more efficient one. Deeper analysis of the income statement may show the company’s income taxes are lower due to increased depreciation on the new press. Do not take one ratio out of context. Make analysis broad enough to consider all results.

Summing Up Your firm and its operations are not static. Analyzing your ratios over a period of time may show trends and movements in your expense and profit picture that require some action. If action is taken, monitoring ratios on a regular basis will help show if the actions were effective and appropriate.

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