Accounting Ratios

Question 1

Return on capital employed

Answer 1

(Profit before interest PAID & tax/ Total Assets)
Less C. Liabilities.
(F. Assets + C. Assets – C. Liabilities.) x 100

Question 2

Gross profit margin

Answer 2

Gross profit/sales x 100

Question 3

Net profit margin

Answer 3

Net profit before tax or dividends / sales x 100

Question 4

Acid test

Answer 4

(Current assets - stock)/ Current liabilities x 100

Question 5

Fixed assets turnover

Answer 5

Sales/ NBV fixed assets

Question 6

Debtor collection period

Answer 6

Trade debtors/current sales x 365

Question 7

Capital gearing

Answer 7

Fixed Return Finance (Preference Share Capital + Loans)
/ Total Finance (L.T. Debt + Ord. Share Capital +
Reserves)

Question 8

How to improve return on capital employed?

Answer 8

Disposal of surplus FA, which can be used to repay LT

debt

Question 9

How to improve gross profit margin?

Answer 9

Increasing the selling price or reducing cost of sales by
finding alternative suppliers or buying in bulk. Changing
sales mix

Question 10

How to improve debtor collection period?

Answer 10

Offering cash discounts for prompt payment, stricter
controls over offering credit, chasing up of outstanding
debts

Question 11

How to improve acid test ratio?

Answer 11

To increase it, short-term creditors could be paid off using
long-term debt. To decrease it, current assets could be
converted into investments

Question 12

How to improve gearing?

Answer 12

Reducing debt, perhaps by issuing shares