The relationship between the elements of an income statement can be illustrated by a percentage analysis of the figures. New sales are set equal to 100 percent, and all other items are expressed proportionately. The absolute figures, alone, are of limited use. Generally, operating results, both dollar and percent, should be compared with past results.
Certain standard ratios are commonly used in studying a company's profit picture. The most fundamental measure is called profit margin.
| Net Profits | ||
| Profit Margin | = | ––––––––––––––– |
| Net Sales |
A second frequently used ratio measures profitability or return on investment. It is determined by reference to both the balance sheet and income statement. Return on investment measures the operating return on invested capital and is expressed as a percentage.
| Net Profits | ||
| Return on Investment | = | ––––––––––––––– |
| Owner's Equity |
Both net profit margin and return on investment can be useful in qualifying a company as a business insurance prospect. Both tests may give some indication of the availability of premium dollars and help in determining what insurance recommendations to propose.
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.