Question

Pick a ratio or two and comment on why it is important in the company your work for or the industry you strive to work in? please explain as much as can to help me understand.

Answer 1

Based on my work experience in manufacturing industry i have explained 2 ratios which i tracked closely

Gross profit ratio:

Gross profit ratio is one of the important ratios to be tracked by an organisation. It decides the net profit margin and Operating profit margin of the company. Also it helps in covering interest expense and improving times interest earned ratio. The higher the ratio it is good for the business since the cash flow from the operations will increase. Gross profit ratio is closely tracked by investors and analyst. Gross profit ratio is also compared across industries and benchmarked to see which company has strong operational profit ratio. Hence Gross profit ratio is an important ratio to be tracked. Gross profit ratio is expressed as percentage of sales.

Inventory turnover ratio:

The Inventory turnover ratio is also of the closely monitored ratio by the manufacturing firm. It helps in checking days in hand inventory. The higher the inventory in hand it means more working capital is blocked. The inventory usually consists of raw material, work in process and finished goods. The inventory turnover ratio is calculated dividing cost of goods sold by average inventory. The higher the ratio it means there is faster movement of inventories in the business which will reduce the days on hand. Firms want minimal inventory days on hand to reduce working capital requirement.