16: Interpretation of accounts - basic ratio analysis

Question 1

What is the formula for gross profit margin?

Answer 1

Gross profit / Sales x 100

Question 2

What is the meaning of the gross profit margin?

Answer 2

Show the gross profit as a percentage to the total sales income

Question 3

What is the formula for operating profit margin?

Answer 3

Operating profit / Sales x 100

Question 4

“Shows the operating profit as a percentage of sales income” - This defines what ratio?

Answer 4

Operating profit margin

Question 5

Return on capital employed (ROCE) is calculated by what formula?

Answer 5

Operating profit / Capital employed x 100

Question 6

What does ROCE stand for and what does mean?

Answer 6

Return on capital employed

Shows how much operating profit is generated as a percentage of the capital used to generate those profits.

Question 7

What is capital employed?

Answer 7

Shareholders’ funds + long term liabilities

Question 8

What are the four types of categories that ratio analysis can fall under?

Answer 8

• Profitability ratios
• Efficiency/ Asset utilisation ratios
• Short term liquidity ratios
• Financing/ Investing ratio

Question 9

Which ratio is sometimes referred to the “primary ratio”

Answer 9

ROCE

Question 10

What are the limitations of ratio analysis? (REMEMBER HITCASE)

Answer 10

HITCASE

Historic data
Inflation
Timings
Comparing like with like
Accounting policies
Standard ratios
Economic conditions