Financial ratios part 2

Subject: Business

Topic: Financial ratios part 2

Financial analysis Part 2

  1. a). Stakeholders affected by financial ratios

i). Managers (such as IT managers)

ii). Shareholders

iii). Customers

b).  Ways in which profitability ratios affect these stakeholders

 Managers: The Average Markup Percentage determines the management decision on the acceptable range for mark-up, within which the organization can work. Profit margin hints on the quality of and efficiency of management.

Shareholders: profitability ratios shows whether current investment decisions are worthwhile or not. The values determine whether or not to continue with current investments. Also hints on the performance of the management.

Customers: the values of the profitability ratios guides their decision on whether or not to maintain long term relationship with the company. Good ratios attract long-term relationship.

Financial institutions: the ratios determine the decision on what loan amount to offer.

  • Management decision that would could affect Gross Profit Margin

Decision to increase prices:

Assuming other factors remain constant, increasing the price of products or services leads to increase in profit margin.

As an example, if a product whose production cost $1000 sells at a profit of 10% now, suppose in the next two months, this production cost remain constant, the management decide to increase price by 5%, the clearly, this increment will be a direct additional revenue. Hence gross profit margin increases.

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