15. Analysing Financial Statements - Ratios Flashcards
What are the 3 comparison options for financial ratios?
Another company, budget or prior period
Who are the 4 users of financial statements?
- Shareholders
- Suppliers/lenders
- Employees
- Management
What is the formula for gross profit margin?
Gross Profit / Revenue
What is the formula for operating profit margin?
Profit before interest and tax / revenue
What is the formula for net profit margin?
Profit after tax / revenue
What is the formula for net asset turnover?
Revenue / Total Assets Less Current Liabilities
or
Revenue / Shareholder funds + Non Current Liabilities
What is the formula for return on capital employed?
Profit before interest and tax / Total Assets Less Current Liabilities
OR
Operating profit margin x net asset turnover
What is the formula for return on equity?
Profit after tax / equity
What is the formula for working captial?
Current assets - current liabilities
What is the formula for the current ratio?
Current assets / current liabilities
What is the formula for the quick ratio?
Current assets - Inventory / current liabilities
What is the formula for receivables collection period?
Trade Receivables / Credit Sales x 365
What is the formula for payables collection period?
Trade Payables / Purchases (or COS) x 365
What is the formula for inventory days?
Inventory / COS x 365
What is the formula for inventory turnover?
COS / Inventory
What is the formula for the operating / cash cycle?
Inventory days + receivables days - payables days
What does it mean to have high gearing vs low gearing?
High proportion of borrowing vs high proportion of equity
What is the advantage of high gearing?
Debt is cheaper than equity (interest is fixed and tax deductible)
What is the disadvantage of high gearing?
Harder to raise additional finance from lenders or new shareholders
What is the formula for the gearing ratio?
Interest bearing debt (excl overdraft, incl pref shares) / TALCL
What is the formula for the debt to equity ratio?
Interest bearing debt (excl overdraft, incl pref shares) / Shareholder Funds
What is the formula for interest cover?
Profit Before Interest and Tax / Interest Payable Expense