Accounting Ratios

Question 1

What do liquidity ratios measure?

Answer 1

The ability of a business to turn its assets into cash

Question 2

What does the current ratio measure?

Answer 2

The level of liabilities in relations to the asset level

Question 3

Current ratio calculation

Answer 3

Current assets / current liabilities

Question 4

What does acid test ratio measure?

Answer 4

The same as the current ratio, but without stock as that is hard to convert to cash

Question 5

Acid test calculation

Answer 5

Current assets - stock / current liabilities

Question 6

What does debtor days measure?

Answer 6

How quickly people owing the business pay back

Question 7

Debtor days calculation

Answer 7

Trade receivable / revenue X 365

Question 8

What does creditor days measure

Answer 8

How quickly the business pays its suppliers

Question 9

Creditor days calculation

Answer 9

Trade payables / cost of sales X 365

Question 10

what do gearing ratios measure?

Answer 10

The amount of Lon term finance for the business that is made up of loans

Question 11

Gearing ratio calculation

Answer 11

Non-current liabilities / capital employed X 100 OR non-current liabilities / shareholders funds

Question 12

What does debt to equity measure?

Answer 12

Compares long term liabilities with share capital and retained profit

Question 13

Debt to equity calculation

Answer 13

Debt / equity

Question 14

What does interest cover measure?

Answer 14

Whether a business can pay any loans, measure the number of times it can pay with its operating profit

Question 15

Interest cover calculation

Answer 15

Operating profit / interest payable

Question 16

What do efficiency ratios measure?

Answer 16

The ability of a business to manage its assets and liabilities effectively

Question 17

What does asset turnover measure?

Answer 17

How efficiently the business uses its non-current assets to generate revenue

Question 18

Asset turnover calculation

Answer 18

Revenue / non current assets

Question 19

What does stock turnover measure?

Answer 19

How quickly stock is sold

Question 20

Stock turnover calculation

Answer 20

Sales / average stock

(Average stock = opening + closing stock / 2

Question 21

What does gross profit margin measure?

Answer 21

The level of profit as a percentage of sales, but only considers costs of production (direct)

Question 22

Gross profit margin calculation

Answer 22

Gross profit / sales X 100

Question 23

What does net profit margin measure?

Answer 23

Profit as a a percentage of sales, taking all costs into account

Question 24

Net profit margin calculation

Answer 24

Net profit / sales X 100

Question 25

What does ROCE measure?

Answer 25

Net profit as a percentage of the capital employed

Question 26

ROCE calculation

Answer 26

Operating profit / capital employed X 100