Turnover ratios and profitability ratios calculation methods: the book or average value

Abstract

The scientific literature of the turnover ratios and profitability ratios calculation offers to use book or average value of balance sheet calculation methods. Different schools of financial analysis nowadays offer many variations of the ratio calculations and even though the components of ratio formulas change, the meaning stays the same. The aim of this research is to analyze the turnover and profitability ratios, to study the different methods of calculation, based on different schools of financial analysis and empirical research results, and to create proposals for companies for the use of these methods for financial analysis. The authors of this paper are using the international scientific literature, articles and research papers that help to study the measures of turnover and profitability ratios. For the empirical research, to compare the results using the book or average value of balance sheet calculations the authors have used the data from the annual statements of Latvian companies from different industries over a six-year period. In the research the authors have applied quantitative and qualitative research methods of economics such as the mathematical and the statistical methods, the ratio analysis, the graphical method, logically – constructive methods. The result of done research shows that differences exist between using the book and average value calculation for turnover ratios and profitability ratios, but quantitative research during six-years period shows that results are uniform and parallel.