5. Performance Indicators - Ratios Flashcards
MARGINS on SALES:
1 of 2
Gross Profit Margin
Gross Profit / Sales rev
MARGINS on SALES:
2 of 2
Net Profit Margin
Net Profit / Sales rev
Also known as:
Profit from Operations
Operating profit
Profit before interest and tax
RETURNS on INVESTMENTS
1 of 2
Return on Capital Employed (ROCE)
Net Profit / TALCL * 100
RETURNS on INVESTMENTS
2 of 2
Return on net assets (RONA)
Net profit / Net assets * 100
Also can get same result from:
Operating profit margin % * Asset turnover
LIQUIDITY or ‘WORKING CAPITAL’ : non-period
1 of 2
Current Ratio
Current assets / Current liabilities
Examines whether value of liquid assets covers the value of short-term liabilities.
normally written as x : 1 but just a straight number in assessment.
Often said should be about 2:1 , however in certain types of biz its not expected to be so high. In a supermarket for example AR will be low compared to AP and inventories are not held for long periods.
2:1 Can be used as a guide for biz where inventory does not sell so quick and where AR is likely to be on credit as well as AP. …. but in a given case look for comparisons (other periods or other similar orgs) rather than judging a single fig against this guideline.
Remember a SFP is a snapshot … a single transaction could make considerable change.
LIQUIDITY or ‘WORKING CAPITAL’ : non-period
2 of 2
Quick Ratio (Acid test)
(Current assets - inventory) / Current liabilities
As a guide a level of 1:1 but a biz with frequent cash inflows may operate atisfactorily on a lower quick ratio.
Comparison with similar businesses gives more useful info. Also remember SFP is a snapshot. In most cases timing of cashflows in and out will be vital factor.
LIQUIDITY or ‘WORKING CAPITAL’ : period
1 of 5
Receivables collection period in days
Trade Receivables / Credit sales * 365
LIQUIDITY or ‘WORKING CAPITAL’ : period
2 of 5
Inventory Holding Period in days
Closing Inventory / Cost of Sales * 365
May use average: (OI + CI) / 2
Could argue nether better.
LIQUIDITY or ‘WORKING CAPITAL’ : period
3 of 5
Payables Payment Period in days
Trade Payables / Credit Purchases (or if unavailable CoS)
FINANCIAL STRUCTURE RATIOS: GEARING
About long term financing of biz:
1 & 2
Gearing Ratio
Total Debt / Total Equity
D / E
Total Debt / (Total Debt + Total Equity)
D / D+E
NB working out Total Equity if given balance sheet ..include: Shareholders funds Share capital Reserves Revaluation reserves
Full Production Cost per unit
From Gareth Jones
Cost of Sales / Units produced
Nb full production cost is CofS … not including operations..
So if given Sales ; GP and Operating profit need to deduct GP from Sales not OP..
Asset Turnover
Measures how well assets have been used this period to generate turnover
Sales rev / (Non-current assets + net current assets)
Ie. Sales rev / TALCL
LIQUIDITY or ‘WORKING CAPITAL’ : period
4 of 5
Inventory turnover or ‘turns’
ie Number of times per year
CofS / Average Inventory
CofS / Closing inventory
This is just the reverse calc of Inventory Holding period and without the *365 to convert it to days.
A higher inventory turn indicates inventory is moving more quickly and this corresponds to a lower average of inventory. Speed should depend on type of business eg. perishable/non-perishable. Also remember seasons with for example fireworks, - SFP date may coinside with unusually high or low inventory ..
LIQUIDITY or ‘WORKING CAPITAL’ :
5 of 5
Working Capital Cycle
Inventory Days + Receivable Days - Payable Days
A greater number of Working Capital Cycle Days indicates a greater investment in working capital (or working capital requirement)
Interest Cover
How many times the business could pay it’s interest out of Profit from Operations
Profit from Operations / Finance Cost (ie Interest)
£ Working Capital Required =
£ Inventory + £ Receivables - £ Payables
CONTROL RATIO 1 of 3: Efficiency ratio % Idle time ratio % Think of variance
standard hrs for actual production / actual hrs * 100
(don’t need to worry about rates)
Think also of the Activity ratio..
Idle hrs / Total hrs * 100
CONTROL RATIO
2 of 3:
Activity Ratio (Output) %
Compare standard hours for actual production with the original plan for the period, the budgeted hours.
This is an indicator of how actual output compares with the budgeted output (known as Activity ratio)
Activity ratio:
standard hrs for actual production / budgeted hrs * 100
This can alternatively be expressed in terms of volume of output (The production volume ratio)
Production Volume Ratio:
Actual Output / Budgeted output
CONTROL RATIO
3 of 3:
Capacity ratio
This control ratio compares the actual ‘capacity’ which has been used with the planned amount.
Capacity (here being measured in terms of direct labour hours) is the amount of available resources being used. Full capacity woud mean all possible resources were being used. Budgeted capacity (probably less than full capacity) would be set in line with planned levels of production and sales.
The capacity ratio shows what proportion of the planned resources have actually been used. This is particularly important when there are significant fixed costs which have been paid to make these resources available
Capacity Ratio:
Actual hrs worked / Budgeted hrs * 100
Value added
A way of showing how the inputs to a company have been changed into valuable outputs (the sales)
‘Value added’ as a financial measure refers to the difference between the value of outputs and the value of inputs.
It shows the increase in monetary value which has resulted from the work done and the use of assets.
Value added = Sales - (Cost of Materials used + bought-in services)
OUTSIDE
