2.1 - Purpose of Key Ratios

Question 1

Return on capital employed

Answer 1

Effective use of resources

Question 2

Return on shareholder’s funds

Answer 2

Effective use of resources

Question 3

Gross profit margin

Answer 3

Assess profitability before taking overheads into account

Question 4

Cost of sales percentage

Answer 4

Assess relationship of costs to revenue

Question 5

Operating cost percentage

Answer 5

Assess relationship of costs to revenue

Question 6

Net margin = operating profit

Answer 6

Assess profitability after taking overheads into account

Question 7

Current ratio

Answer 7

Assess ability to pay current liabilities from reasonably liquid assets

Question 8

Quick ratio

Answer 8

Assess ability to pay current liabilities from reasonably liquid assets

Question 9

Gearing ratio

Answer 9

Assess reliance on external finance

Question 10

Interest cover

Answer 10

Assess ability to pay interest charges

Question 11

Net asset turnover

Answer 11

Assess revenue generated from asset base

Question 12

Inventory turnover

Answer 12

Assess level of inventory held

Question 13

Inventory days

Answer 13

Assess the average inventory-holding period

Question 14

Trade receivables collection period

Answer 14

Assess ability to turn receivables into cash

Question 15

Trade payables payment period

Answer 15

Assess ability to pay suppliers