Definition: Ratio analysis is like the super-spy tool in a business detective's toolkit! It helps us peek into a company's financial health by examining its financial statements.

Why do we care?

• Historical Comparisons: Ever thought about time travel? 🕰 Ratio analysis lets you see how a company performed in the past!

• Inter-firm Comparisons: Wanna know how your fave company stacks up against its rivals? With ratio analysis, it’s like comparing apples to oranges... or iPhones to Androids! 📱🍏🍊

  Real-world Example: Think of it like comparing your grades with your past performance and also with your classmates'. Helps you know where you stand!

What are they? These are the cool ratios that show how well a company is turning its operations into cold hard cash (profits).

Star Players

• Gross Profit Margin: Reveals the profit made after selling stuff, but before considering all other costs.

• Profit Margin: This tells us the net profit (after ALL expenses) for every dollar of sales.

• Return on Capital Employed (ROCE): Like a report card for the company's big investments! It shows how good they are at turning investments into profits.

  Real-world Example: Imagine you sell lemonade 🍋. The money you make after deducting just the cost of lemons and water is your Gross Profit. But after you take away all costs, including the stand rent and sugar, what you have left is your Net Profit.