21. The interpretation of financial statements Flashcards
Ratios
comparison of one figure with another
Using ratios
Comparison is commonly made with; previous accounting periods other companies budgets and forecasts government stats other ratios
Types of ratios
profitability ratios (performance) liquidity (solvency) efficiency capital structure (gearing) security (investors)
Gross profit margin
gross profit / sales
Gross profit mark up
gross profit / cost of sales
Operating profit margin
operating profit/ sales
Capital employed
equity + non current liabilities
or just equity
ROCE (return on capital employed)
Operating profit / average capital employed
Average capital employed
closing total capital employed
+ opening total capital employed
/ 2
ROE (return on equity)
profit for the period / average equity
Average equity
closing equity
+ opening equity
/ 2
net asset turnover
sales revenue / capital employed
= times per annum
Relationship between ratios
operating margin x asset turnover = ROCE
operating profit sales revenue = operating profit
/ /
sales revenue x capital employed = capital employed
Current ratio/ working capital ratio
current assets / current liabilities
i.e. 8.9:1 = for every £1 owed the business has £8.9 in assets to pay the debt = GOOD
Quick ratio/ acid test ratio
current assets excluding inventories
/
current liabilities
420/ 420 = 1 = ideal
sales : non current assets
sales
/
non current assets
tells us how much sales are derived from the non current assets in the business
Inventory days
inventory
/
cost of sales
x 365
how long is it taking us to sell out inventory
Average inventory
opening inventory
+ closing inventory
/ 2
Receivables days
receivables / sales x 365
Payable days
payables / purchases x 365
Total working capital ratio
Number of inventory days
+ number of receivable days
- number of payable days
= total working capital days
Gearing ratio
debt
/
total capital employed
x 100
Interest cover
operating profit
/
interest payable