The most important ratios for analysing the income statement

Get to know through our HowTo the main ratios to take into account when analysing the situation of your business' profit and loss account and that of your competitors, a vital exercise for identifying problems and making the right decisions in the company.

The income statement

Knowing the financial ratios is crucial when it comes to to analyse the current situation of the company and take the appropriate decisions in each case.

The company's financial statements are divided into two main sections: the balance sheet and the income statement. The income statement is usually the first page of the financial document, and shows the company's revenues, expenses and net profit. From this information, we will calculate our financial ratios for the income statement.

After analysing our profit and loss account, we will know whether the business is it profitable or not and its associated risk. The most important ratios to take into account when analysing the income statement are: sales development, gross margin, EBITDA margin, EBIT margin, EBIT margin and profit on sales.

The most important ratios for the income statement

1. Sales performance

This ratio offers a a true and fair view of the company's development in relation to its competitors. While calculating your company's market share can be costly and unreliable, analysing sales performance can be a much cheaper and more useful way of finding out whether your company is gaining or losing ground on the competition.

A widely used indicator of sales development in the distribution sector is the like-for-likeor comparable sales growth. Sales growth can be due to the opening of new shops or to more being sold in each shop. The latter possibility is more profitable and also reflects more clearly the success of the business.

Gross margin

We can calculate the gross margin, also known as the industrial margin, as Gross profit / Sales. This ratio reflects the difference between what the company charges for its products and what it costs to make (or buy) them.

For this reason, we can say that the gross margin indicates the added value at which the company sells its products. Therefore, the value of this ratio will decrease if our company invests less in innovation, or if our competition grows.

3. EBITDA margin

This key financial ratio when analysing the income statement indicates the return on sales of your company's operations, measured before the "consumption of fixed assets" that are used, i.e. taking into account only cash flow expenses.

We can calculate the EBITDA margin as: EBITDA / Sales.

4. EBIT margin

The EBIT Margin allows us to know the return on sales of our business operations, measured after the "consumption of fixed assets" used, but not including the financing costs and taxes paid by the company.

Therefore, the formula for calculating this ratio is as follows: EBIT / Sales.

5. Profit on sales

Profit from sales, Return on Sales or ROS, is calculated as Net Profit / Sales.

This ratio will allow us to know the situation of our company's profit and loss account with all its costs, including interest and tax payments, through the analysis of our ROS and its comparison with that of our competitors.