The most common thought among business owners, consultants, investors and students is the ‘bottom line’. The proper word is of course ‘PROFIT’. In business, the single number one reason to operate is to make a profit.
Also known as operating ratios, performance ratios measure the income statement performance (gross, operating and net profit margins) and the net profit relationship against total assets and equity. Performance ratios are a set of business ratios.
This site has an article for every performance ratio explaining how the respective ratio works, its nuances and drawbacks. They are designed to give an advantage over less sophisticated users of ratios.
Ratios are used in business to compare companies of different sizes within the same industry. The goal is to discover the best investment for return on your stock purchase. Business ratios essentially equalize different size companies within the same industry. A common mistake is to compare two different industries within the same sector (explained below).
The net profit margin reflects the profitability of the company as a percentage of net sales. It is one of the performance ratios used in evaluating business. Interestingly, some consider it the most important ratio. These users of business ratios take a very simplistic approach towards business evaluation.
One of the performance ratios used in business identifies the overall ability of management to efficiently utilize resources to generate a profit. Corporate resources include human knowledge/skills and the balance sheet assets of the business. The labor component is unquantifiable in terms of dollars, but assets with a dollar value associated with them are reflected on the balance sheet. The return on assets measures management’s ability to earn a profit on these balance sheet assets.