The computation of the three ratios
Return on Assets (RoA)
Return on Equity (RoE)
Profit Margin
The purpose and information conveyed by each ratios
The three ratios presented and computed in the previous section represent vital profit generation indicators for a modern commercial organization. The return on assets (RoA) shows how well the company utilizes the entirety of its assets, including the borrowed ones, to generate financial returns. The return on equity is largely similar to this metric, but it does not consider the debt of the company (Gallo, 2016). Finally, the profit margin is one of the most important indicators of financial health, as it draws a direct comparison between sales and profits, showing how much the company actually earns from its operations.
ABC Company review on three ratios
First of all, the ABC Company’s business model can be deemed successful, as it generates adequate profits. Optimal returns on equity and assets show that the investors can reasonably expect returns on their participation in the company’s financing. The profit margin is also considerable, which means that this aspect of the firm is handled well.
The profitability of the company
Overall, the ABC Company remains a profitable enterprise that successfully converts its assets into revenues. The profit margin is over 50%, which is commendable, even though the overall turnover is below $1 million. Therefore, the business model on its own functions well, allowing the ABC Company to retain a stable position on the market. However, it may not suffice for the sustained growth in the long-term.
ABC Company financial successful
While the ABC Company’s financial statement may present positive indicators, it would be unwise to consider the company in isolation. Instead, it appears to interesting to compare the entity’s performance against the industry’s leaders to identify the areas in which it excels or where the improvements are needed. First of all, the return on assets is provided by Rose (2022), indicating that the industry’s average was set at 9.1-9.3% across the past four years. The ABC Company’s figures are considerably higher at the moment with 28.3%, but it is important to note that its absolute cash flows are not on par with the industry’s leaders. Thus, it is possible that the ABC Company’s ratios will become lower as the entity continues to grow.
This difference becomes particularly evident when the income levels are compared with the industry’s average figures. As far as net income is concerned, the industry has averaged at $4.7 million in 2020. The ABC Company is far from this level, as its net income is only $77,000, which implies that it still has a long growth phase ahead. Furthermore, the industry’s leaders, such as Williams-Sonoma, have hundreds of millions of sales, whereas the ABC Company only has half-a-million. As the total assets of the company increase, there is no guarantee that its profit margins and returns on investment will remain equally high. Under these circumstances, the emphasis will be on maintaining the profitability of operations above the average level across the industry.