Financial statement analysis involves a study of the relationships between income statement and balance sheet accounts, how these relationships change over time , and how a particular company compares with other company in the same Industry. Although financial analysis has limitations, when used with care and judgment, it can provide very useful insights into a company performance and financial health.
The most common profitability ratio is profit margin. Profit Margin or percentage of revenue allows investors to compare the profitability of different companies in similar industries, while net earnings, which are presented as an absolute number, cannot. A higher profit margin indicates a more profitable company that has better control over its cost compared to its competitors, in other words its can give investors deeper insight into management efficiency. Increased earnings are good but an increase does not mean that the profit margin of a company is improving, for instance, if a company has costs that have increased at greater rate than revenue, its lead to lower profit margin. These indicate that costs need to be under better control as well.>>>to be continued<<<<
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