Skip to main content

Business Finance EBK HEALTHCARE FINANCE: AN INTRODUCTION

Use of ratio analysis in interpretation of income statement data. Ratio is a statistical tool to measure value of one item in context of the other, amount taken in denominator is the base value and the result of ratio presents the proportion of base value which is represented by numerator, in other words, ratio shows how many times the numerator value is when compared with base value. Ratio analysis is the use of relationship between value of numerator and denominator as given by the ratio, to reach meaningful conclusions and gain insights in to interplay of various variables. Income statement data contains various variables like revenue, cost of goods sold, interest expense, earnings before interest and tax, net income, etc. These variables relate to each other and therefore the study of their relationship, as done in ratio analysis, can help the analysts better understand the financial position of the company. For instance, cost of sales to sales ratio, can give an insight in to the variable cost structure of the company and can help the analyst understand company’s top line margins. Similarly, various ratios can be used to understand various trends and relationships which exist between these variables and facilitate a thorough understanding of income statement and also make it possible for the analyst to predict future trends at varying levels of output or activity. Another important feature of ratio analysis is that it allows standardization of these relationships by considering best in industry performances and therefore enhances the comparability of income statement. Performance of the company can be compared with other companies by comparing their key ratios such as gross margin ratio, net profit ratio, interest coverage ratio, etc. This allows a better understanding of business risks, opportunities and performance.

Use of ratio analysis in interpretation of income statement data. Ratio is a statistical tool to measure value of one item in context of the other, amount taken in denominator is the base value and the result of ratio presents the proportion of base value which is represented by numerator, in other words, ratio shows how many times the numerator value is when compared with base value. Ratio analysis is the use of relationship between value of numerator and denominator as given by the ratio, to reach meaningful conclusions and gain insights in to interplay of various variables. Income statement data contains various variables like revenue, cost of goods sold, interest expense, earnings before interest and tax, net income, etc. These variables relate to each other and therefore the study of their relationship, as done in ratio analysis, can help the analysts better understand the financial position of the company. For instance, cost of sales to sales ratio, can give an insight in to the variable cost structure of the company and can help the analyst understand company’s top line margins. Similarly, various ratios can be used to understand various trends and relationships which exist between these variables and facilitate a thorough understanding of income statement and also make it possible for the analyst to predict future trends at varying levels of output or activity. Another important feature of ratio analysis is that it allows standardization of these relationships by considering best in industry performances and therefore enhances the comparability of income statement. Performance of the company can be compared with other companies by comparing their key ratios such as gross margin ratio, net profit ratio, interest coverage ratio, etc. This allows a better understanding of business risks, opportunities and performance.

Solution Summary: The author explains the use of ratio analysis in interpretation of income statement data. It is a statistical tool to measure value of one item in con of the other.

EBK HEALTHCARE FINANCE: AN INTRODUCTION

EBK HEALTHCARE FINANCE: AN INTRODUCTION

6th Edition

ISBN: 9781567937428

Author: Gapenski

Publisher: YUZU

See similar textbooks

Videos

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

Blurred answer

Chapter 3, Problem 15.2STQ

Chapter 3, Problem 16.2STQ

Students have asked these similar questions

Define the term income summary.

what is the process of projecting the income statement?

Explain how to prepare a condensed income statement.

Chapter 3 Solutions

EBK HEALTHCARE FINANCE: AN INTRODUCTION

Ch. 3 - Prob. 1.1STQ Ch. 3 - Prob. 1.2STQ Ch. 3 - Prob. 2.1STQ Ch. 3 - Prob. 2.2STQ Ch. 3 - Prob. 2.3STQ Ch. 3 - Prob. 3.1STQ Ch. 3 - Prob. 3.2STQ Ch. 3 - Prob. 3.3STQ Ch. 3 - Prob. 3.4STQ Ch. 3 - Prob. 3.5STQ

Ch. 3 - Prob. 4.1STQ Ch. 3 - Prob. 4.2STQ Ch. 3 - Prob. 4.3STQ Ch. 3 - Prob. 5.1STQ Ch. 3 - Prob. 5.2STQ Ch. 3 - Prob. 5.3STQ Ch. 3 - Prob. 6.1STQ Ch. 3 - Prob. 6.2STQ Ch. 3 - Prob. 7.1STQ Ch. 3 - Prob. 7.2STQ Ch. 3 - Prob. 7.3STQ Ch. 3 - Prob. 8.1STQ Ch. 3 - Prob. 8.2STQ Ch. 3 - Prob. 8.3STQ Ch. 3 - Prob. 8.4STQ Ch. 3 - Prob. 9.1STQ Ch. 3 - Prob. 9.2STQ Ch. 3 - Prob. 9.3STQ Ch. 3 - Prob. 10.1STQ Ch. 3 - Prob. 10.2STQ Ch. 3 - Prob. 11.1STQ Ch. 3 - Prob. 11.2STQ Ch. 3 - Prob. 12.1STQ Ch. 3 - Prob. 12.2STQ Ch. 3 - Prob. 12.3STQ Ch. 3 - Prob. 13.1STQ Ch. 3 - Prob. 13.2STQ Ch. 3 - Prob. 13.3STQ Ch. 3 - Prob. 13.4STQ Ch. 3 - Prob. 14.1STQ Ch. 3 - Prob. 14.2STQ Ch. 3 - Prob. 14.3STQ Ch. 3 - Prob. 15.1STQ Ch. 3 - Prob. 15.2STQ Ch. 3 - Prob. 16.1STQ Ch. 3 - Prob. 16.2STQ Ch. 3 - Prob. 3.1Q Ch. 3 - Prob. 3.2Q Ch. 3 - Prob. 3.3Q Ch. 3 - Prob. 3.4Q Ch. 3 - Prob. 3.5Q Ch. 3 - Prob. 3.6Q Ch. 3 - Prob. 3.7Q Ch. 3 - Prob. 3.8Q Ch. 3 - Prob. 3.9Q Ch. 3 - Prob. 3.1P Ch. 3 - Prob. 3.2P Ch. 3 - Prob. 3.3P Ch. 3 - Prob. 3.4P Ch. 3 - Prob. 3.5P Ch. 3 - Prob. 3.6P Ch. 3 - Prob. 3.7P Ch. 3 - Prob. 3.8P Ch. 3 - Prob. 3.9P

Knowledge Booster

Background pattern image

Finance

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Recommended textbooks for you

Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College

Text book image

Principles of Accounting Volume 1

Accounting

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax College

SEE MORE TEXTBOOKS

ACCOUNTING BASICS: Debits and Credits Explained; Author: Accounting Stuff;https://www.youtube.com/watch?v=VhwZ9t2b3Zk;License: Standard Youtube License