Building Financial Models with Microsoft® Excel®: A Guide for Business Professionals, Second Edition

Chapter 12. Financial Ratios Analysis

This chapter covers the use of financial ratios to analyze and assess Napavale's operations. Financial ratios are metrics that compare various elements of a business's operations; one example would include Gross Margin, which is calculated as: (Gross Profit)/(Sales). Financial ratios are used in several productive ways: They enable the comparison of ratios for a specific company across various accounting periods and they enable the comparison of a specific company to competitors and/or a broad set of companies, such as those included in an index such as the S&P 500 (Standard & Poor's 500, which is an index used to track a set of companies), among other uses.

Using Napavale's financial model, I will calculate three sets of financial ratios: profit margins, investment returns and management efficiency. The ratios covered in this chapter represent a small subset of the range of ratios used in the financial community. Depending on the nature of your own financial model, you may find it useful to use different or additional ratios to analyze and assess the operations of your own company. Regardless of the ratios you use, the process described in this chapter should apply to a wide array of financial ratios calculations.

PROFIT MARGINS—FINANCIAL RATIOS

The first set of financial ratios that I cover in this chapter, those related to profit margins, measure Napavale's relative profitability in several different ways. The first ratio, Gross Margin, compares ...