8) Analysing Ratios Flashcards
What are profitability ratios
Profitability refers to the earning capacity of the business during teh accounting period.
What is the profitability ratio of Profit
Profit ratio shows the percentage of the profit that is contained in each dollar of sales. Ideal is positive
= Profit / Net Sales * 100 = ?%
What is the profitability ratio of gross profit
Gross profit ratio is a measure of the level of profit available after subtracting teh cost of the sales expense, to cover teh remaining expenses of a business. Ideal is a positive amount
= Gross Profit/Net Sales * 100 = ?%
What is the profitability ratio of expense
Compares teh sales to the total operating expenses. The lower the better.
= Expenses (other than cost of sales) / Net sales * 100 = ?%
What is the profitability ratio of rate of return on assets
Shows teh overall earnign power of the total assets before any payments to equity or debt providers. The higher the better. Ideal is positive, negative indicates loss.
= Profit / Average Assets = ?%
Average Assets = Assets at start + Assets at end / 2
What are liquidity ratios
Liquidity ratios assist in assessing the businesses ability to meet its financial commitments in the short term.
What is teh liquidity ratio of working capital
Shows short term debt payign ability. The higher the better. Ideal is 2:1 as it indicates that for eveyr $1 of current liabilities the business has $2 in current assets. If ratio bigger than 2:1, business maybe missing investment opportunities.
= Current Assets / Current Liabilities
What is the liquidity ratio of quick asset
Quick asset is a measure of the ability of a business to pay its short term debts using only its more liquid current assets. The higher the better. Idea is 1:1. If less, business not able to pay in an emergency.
= Current Assets (excluding inventory are prepayments) / Current Liabilities = ?:1
What are gearing or leveage ratios
Leverage describes the extent ot which teh busienss has funded its operations from borrowed funds rather than equity.
What is the gearing ratio of debt to equity
measures how the business has fundede its assets comparing teh total liabilities to the amount of contributed equity. Lower it is, the safer financially.
= Total Liabilities / Equity * 100 = ?%
