12. Interpreting Financial Statements Flashcards
What are the profitability and efficiency ratios?
- Gross profit margin
- Operating profit margin
- Expenses ratio
- Asset turnover
- Return on capital employed
- Return on total assets
- Return on equity
- Earnings per share
Why are gross and operating profit margins used?
To make pricing decisions, a falling margin may be due to increased costs or reduced sales prices.
What do differences between gross and operating profit margins allow you to establish?
If the changes are direct or are caused by overheads
What are expenses ratios used?
It shows the expenses other than cost of sales. A high expense ratio indicates a problem with cost control
What is asset turnover used?
To show how much turnover is generated for every £1 of assets employed.
Why is return on capital employed used?
To show how much profit is generated for every £1 of assets employed
What is return on total assets?
The return generated per £1 of assets
What is return on equity?
Return generated per £1 of shareholders equity
What are the liquidity ratios?
- Current ratio
- Quick ratio
What does current ratio indicate?
How many times the current liabilities are covered by the current assets
What does the quick ratio show?
How many times the current assets cover the current liabilities without the inventory included.
What are the use of resources ratios?
- Inventory holding period and turnover
- Receivables collection period
- Payables payment period
- Working capital cycle
What are the financial position ratios?
- Gearing
- Interest cover
What is gearing?
The percent of debt to total financing, higher gearing means less profit available to distribute
What does the interest cover show?
How easily the company can make its interest payments out of its profits
