Jaws ratio is defined as the difference between the percentage growth in income and the percentage growth in expenses. It is a key indicator of financial performance of an organizations and it is been widely used as a tool to control the expenditure and increase the revenue level of the organization. The jaws ratio can be of 02 types namely,
Positive Jaws Ratio
Positive jaws ratios occurs at times whether the percentage of increase in revenue is higher than the percentage of increase in expenses level of the organization. When there is a positive jaws ratio the company is considered to be performing well as they are able to generate higher profits.
Negative Jaws Ratio
Negative jaws ratio occurs when there is percentage increase in expenses are higher than the percentage increase in income of an organization. When there is a negative jaws ratio for an organization the financial performance of the organization is not favorable as the organization tend to experience low profit levels.
Jaws ratio is considered as a key financial indicator for investors who make their investment decisions as it indicates the growth in revenue compared to its expenses. During the times of inflation jaws ratio can be used to as tool to compare the revenue growth and expense growth a result of inflation.