Key Management Ratios: The Clearest Guide to the Critical Numbers That Drive Your Business, Fourth Edition

Chapter 5. Measures of performance

Relationships between the balance sheet and profit and loss account • The ratios ‘return on total assets’ and ‘return on equity’ • Balance sheet layouts

	I often wonder what the vintners buy one that is half so precious as the goods they sell.
	--RUBAIYAT OF OMER KHAYYAM (1859)

Relationships between the balance sheet and profit and loss account

When we wish to examine a company’s profitability performance, we look at its absolute profit in relation to the assets tied up in the business. But the question arises: which figure should we take from the profit/loss account, and which figure from the balance sheet?

Figure 5.1 shows the accounts for the Example Company plc with values extracted for:

Profit/Loss account	Balance ...