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The claim of profit in the financial statements of a business is not good enough metric for comparing performances with preceding years and with other businesses operating in the same sector.

A trend analysis must be done to have an accurate knowledge of the relative position of the business.

This is the most reliable way to know if things are improving or deteriorating.

Trend analysis is used to evaluate business’s performances over time and with those of other businesses of same size in the same industry.

In reviewing trends and comparing businesses, ratio analysis is used to interpret relevant financial statements.

The categories of ratios often used, are those which test the solvency, the profitability and the efficiency of businesses.

To analyze the solvency of a business over time and compare that with those of companies within the same sector, the current ratio is used.

The current ratio compares total current assets to total current liabilities.

The analysis of the profitability trend employs:

gross profit to sales ratio ,
the net profit after tax to sales ratio,

the return on capital employed (ROCE) – compares profit earned before interest and tax (PBIT) to funds employed to generate the return and.

Return on share capital (ROSC) – often compares profit before tax (PBT) to share capital and reserves.

The profitability of how shareholders’ investment has been used is directly proportional to the value of the ROSC. The higher the ROSC value the higher the profitability.

Listen to the full course on SPOTIFY at

https://open.spotify.com/show/2DSMPnf56LJsttgMYMFZ5u