12 - Interpreting Financial Statements

Question 1

What is the formula for asset turnover?

Answer 1

Revenue / Capital Employed (shows how much turnover is generated per £ of assets employed, higher)

Question 2

What is the formula for return on capital employed (ROCE)?

Answer 2

Operating profit / capital employed x 100 (shows how much profit is generated from each £ of assets employed, higher)

Question 3

What is the formula for return of shareholder funds?

Answer 3

Profit after tax / total equity x 100 (shows return generated per £1 of shareholder equity, higher)

Question 4

What is the formula for current ratio?

Answer 4

current assets / current liabilities (shows how many times current liabilities are covered by current assets, higher)

Question 5

What is the formula for quick ratio?

Answer 5

Current assets - inventory / current liabilities (shows shows how many times current liabilities are covered by current assets but removed inventory which are sometime hard to convert into cash, higher)

Question 6

What is the formula for inventory holding days?

Answer 6

inventories / cost of sales x 365 (shows how many days inventory is held for before sold, lower)

Question 7

What is the formula for receivables collection days?

Answer 7

Trade Receivables / revenue x 365 (shows how long it takes for payment to be made for receivables, lower)

Question 8

What is the formula for payable collection days?

Answer 8

Trade Payables / cost of sales x 365 (shows how long it takes for payments to be made for payable, lower as it keeps cash in the business)

Question 9

What is the formula for working capital cycle?

Answer 9

Inventory days + receivable days - payable days (shows how long a business needs to fund its purchase of good, the longer the cycle the longer the business has to find financing, lower)

Question 10

What is the formula for gearing?

Answer 10

Non current liabilities /equity + non current liabilities x 100 (shows the risk of the company by measuring % of debt to the total financing, high gearing means less profit for shareholder due to high interest charges, lower)

Question 11

What is the formula for interest cover?

Answer 11

Operating profit / finance costs (shows how easily the business can make its interest payments out of it profits, higher)

Question 12

What is the formula for capital employed?

Answer 12

Total assets - current liabilities