If you are in the business of making money, you might think of financial ratios as a series of numbers that list the ratios between investment, income, and expenses. In other words, the ratios of money invested, money earned, and money spent. Of course, some financial ratios are more complicated than this, so I’m not here to tell you how to read these numbers.
For the most part, you can think of a financial ratio as a way of comparing the amount of money you’ve “invested” into a business with the amount of money you’ve made off that business. It’s a simple way to compare how much money you’re making with how much money you’re spending.
In this presentation, Im going to talk about the four most important ratios in the financial world.
The first is the gross profit margin, which is a ratio that tells you how much profit your business makes from each trade. You can use this ratio to determine whether your business is growing or is in danger of dying. The second is the net profit margin, which tells you how much money your business makes off each trade compared to the cost of each trade.
Using the net profit margin tells you that youre spending too much money on the trade. The third, the total cost of the trade, tells you how much money your business costs from each trade compared to the gross profit. The fourth ratio, the discount rate, tells you how much money it costs you to make each trade from each price.
The net profit margin is a good example of what I call the “two-tiered” model of financial ratios. In the first tier, the total net profit margin tells you how much money your business makes off each trade. The second kind of ratio uses the net profit margin to tell you how much money your business costs from each trade compared to the gross profit.
The net profit margin is another way of saying that each dollar that you invest in a company is roughly equal to about a dollar you could spend on a new car. I use this figure as a way of balancing the two-tier model of financial ratios. Because each dollar you invest in a company costs about half a dollar you could spend on a new car. In other words, you end up with a lot less money invested than you would have if you had just bought a new car.
This is one of those things that is easy to forget, but the net profit margin is an important metric for any company. It takes the money that is spent on an item like advertising and turns it into profit. In the case of a retailer like Amazon, this means that the money that Amazon has spent advertising on a certain company’s product is equal to the number of dollars you could invest in that company’s stock.
It’s true that it can be harder to track the difference between spending on advertising and investing in stock. A company doesn’t invest in advertising because the company thinks it will make more money that way. They spend their money on advertising because they believe their customers will buy it. This is pretty much the case with Amazon. They believe that customers (and, more specifically, their customers in the US) will spend more on Amazon because they trust the company’s product.
So if you want to know why Amazon is making more money per customer than the average stock market analyst, you need to understand the difference between spending on advertising and investing in stock. As a company grows, you increase the price of your stock by adding more stock to their portfolio. This is how Amazon became so successful. They started a new, larger branch of their business, which grew their price by adding to their existing portfolio.