3.7.2 Financial ratio analysis Flashcards
Sales revenue
The initial value of money made, at the start of the income statement
On the income statement
Cost of sales
Also known as variable costs; expense of the sales, eg, purchases and delivery
On the income statement
Gross profit
Least accurate value of profit
On the income statement
Calculation for gross profit?
Sales revenue - Cost of sales
On the income statement
Expenses
Also known as fixed costs; expenses that are always charged no matter what, eg. rent, salaries, depreciation, etc
On the income statement
Operating profit
Relatively accurate measurement of profit
On the income statement
Operating profit calculation?
Gross profit - Expenses
On the income statement
Tax
Corporate tax often calculated as a percentage of the operating profit.
On the income statement
Net profit
The final most accurate valuation of the profit of that financial year
On the income statement
Assets
anything belonging to the business that brings in revenue
On the balance sheet
Non current assets
Assets that will take more than a financial year to be liquidised.
On the balance sheet
Current assets
Assets that can be liquidised within a financial year
On the balance sheet
Examples of current assets
- Inventory
- trade receivables
- other receivables
- cash and cash equivalents
(in order of hardest to easiest to turn into cash)
On the balance sheet
Examples of non current assets
Vehicles, premises, machinery
On the balance sheet
Non current liabilities
Liabilities that are not predicted to be paid back within the next financial year
On the balance sheet
Liabilities
Things that the business owes/debt
On the balance sheet
Examples of non current liabilities
Bank loans and debentures
On the balance sheet
Current liabilities
Liabilities that are expected to be paid back within the next financial year
On the balance sheet
Examples of current liabilities
- Payables,
- Short term bank loans
- overdrafts
- other payables
On the balance sheet
working capital calculation
current assets - current liabilities
On the balance sheet
Net assets calculation
NCA + WC - NCL
On the balance sheet
Total equity calculation
Retained revenue+ Share capital
On the balance sheet
Retained revenue
remaining profits from the previous year
On the balance sheet
GPM and calculation
Gross profit margin
(gross profit/revenue) x 100%
On the balance sheet
OPM and calculation
Operating profit margin
(operating profit/revenue) x 100%
On the balance sheet
PM and calculation
Profit margin
(net profit/revenue) x 100%
On the balance sheet
ROCE and calculation
Return On Capital Employed
(operating profit/capital employed) x 100%
On the balance sheet
Liquidity calculation
(current assets/current liabilities) : 1
also known as the current ratio
Ideal liquidity
2:1
Gearing
(non current liabilities / capital employed ) x 100%
Ideal gearing ratio
Less than 50%
Why can a high gearing ratio sometimes be acceptable
Loans are often taken out to start investments and this means that the business is going to earn their money back quickly and pay back their debts, dropping a gearing of 85% to maybe 35% within a couple of years
Net assets
Shows the value of the business
On the balance sheet
What does gearing assess
Gearing assesses whether a business is a risk from having too much debt
What does the inventory turnover ratio measure
It measures how often a business replaces its stock in a year
