One way to measure a company’s efficiency is to calculate its Return on Assets or ROA. As you know, assets on the balance sheet are essentially proceeds of or means to make business. They are the resources a company has in its possession to use according to its management best judgment.

ROA is an indicator of how profitable the company is in relation to its total assets (including both current and non-current assets as of the balance sheet date). Essentially ROA shows how efficiently the management uses the resources available for them to generate profit. Consequently, ROA is calculated as follows: annual earnings (net profit) are divided by total assets. The end result is displayed in percentage thus showing how profitable the assets of the company are.
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‘Quick ratio’ is used to measure company’s liquidity. To start from terminology, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.

Company’s liquidity using the quick ratio is therefore measured using the following formula – current assets minus inventory is divided by current liabilities. Current assets are the resources, which are used to satisfy all current liabilities due in less than 12 months. As current assets are also meant to be collected and turned into tradable resources (i.e. cash) in less than 12 months, those two enable us to evaluate the company’s ability to continue as a going concern using its current business course and finances.
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‘Current ratio’ is used to measure company’s liquidity. As you know, liquidity means the ability to pay up debt and obligations taken. The higher the liquidity, the more resources a company has to satisfy its creditors. Liquidity is achieved by having cash and cash equivalents, accounts receivable and inventory at least at stabile levels. The higher those levels, the more liquid a company may be deemed.

Company’s liquidity is therefore measured using a simple formula – current assets are divided by current liabilities. Current assets are the resources, which are used to satisfy all current liabilities due in less than 12 months. As current assets are also meant to be collected and turned into tradable resources (i.e. cash) in less than 12 months, those two enable us to evaluate the company’s ability to continue as a going concern using its current business course and finances.
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The best way to measure two seemingly identical companies is using financial ratios. They are same for every company so obviously they give an independent and objective financial measure of the performance of each. However, do note that companies operating in totally different business sectors don’t necessarily have comparable ratios – like fruit seller compared to car manufacturer – the inventory turnover is completely different for those two.

A financial ratio simply put is a relative magnitude of two or more numerical values. The numbers are taken usually from company’s own financial statements (usually from balance sheet, income statement and statement of cash flows). The ratio is expressed either in decimal values or as a percentage. As a general rule, ratio lower than 1 is shown as a percentage and ratio above 1 is shown in decimal value.
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On the IFRS Income Statement there’s a line labeled as ‘gross profit’. It’s just below ‘revenue’ and ‘cost of sales’ and as it happens, reflects earnings left from deducting costs necessary to make a sale happen from revenue earned. Yes, it’s the first total displayed on the income statement, but it’s there for a reason.

Gross profit or gross income is the residual profit after selling a product or a service to someone and subtracting any expense associated with its purchase, production and the sale itself. What it essentially shows, is whether you are making profit or loss with the sales. You may think that c’mon, every sale is a profit, but is it so?
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