Key Management Ratios, 4th Edition

5

Measures of performance

Relationships between the balance sheet and the profit and loss account

• The ratios ‘return on total assets’ ‘and return on equity’
• Balance sheet layouts

I often wonder what the vintners buy 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 ...