2nd Half Formulas + Meanings Flashcards
Gross profit margin formula
Gross profit/Sales revenue
Operating profit margin formula
Operating profit/Sales revenue
Net profit margin (after taxation) formula
Net profit margin after tax/Sales revenue
Net profit margin (before taxation) formula
Profits before taxation/sales revenue
ROCE
Return On Capital Employed
ROCE formula
Operating profit/Total equity + Non-current liabilities
What kind of ratios do you multiply by 100?
The profitability ratios
What kind of ratios do you not multiply by 100?
The efficiency and liquidity ratios
Current ratio formula
Current assets/current liabilities
Acid test (quick) ratio formula
Current assets (excl. inventories)/current liabilities
The norm for current ratios
Current assets should be 2x more than current liabilities
The norm. ratio for acid test (quick) ratios
1:1
What does it mean when the inventory turnover period is 50 days?
The business is able to turn the inventory into cash in 50 days.
What does it mean when the settlement for trade receivables is 50 days?
The business will receive the owed payments of its customers in 50 days.
What does it mean when the settlement for trade payables is 50 days?
The business will pay the payments it owes to its suppliers in 50 days.
Gearing ratio
Non-current liabilities/Equity + Non-current liabilities
Meaning of gearing ratio when it’s high
The higher the gearing ratio, the higher the risk of an entity becoming insolvent (unable to pay the debt owed). Therefore, LOWER GEARING RATIO IS BETTER
Interest cover
Operating profit/Finance costs
Question interest cover poses
How many times are you able to cover your interest in a year?
Earnings per share ratio
Earnings available to ordinary shareholders/Number of ordinary shares in issue
Price/earnings ratio
Market value per share/earnings per share
Dividend yield
Dividend paid per share/market price per share x 100
Dividend cover
Profit for the year (after tax)/ordinary dividend paid OR Earnings per share/Dividend per share
Inventory turnover
Inventories held/Cost of sales x 365 days
Settlement period for trade receivables
Trade receivables/sales revenue x 365 days
Settlement period for trade payables
Trade payables/Cost of sales x 365 days
As for the efficiency ratios, is shorter better or worse?
Shorter days are better
