Accounting Ratios Flashcards
What do liquidity ratios measure?
The ability of a business to turn its assets into cash
What does the current ratio measure?
The level of liabilities in relations to the asset level
Current ratio calculation
Current assets / current liabilities
What does acid test ratio measure?
The same as the current ratio, but without stock as that is hard to convert to cash
Acid test calculation
Current assets - stock / current liabilities
What does debtor days measure?
How quickly people owing the business pay back
Debtor days calculation
Trade receivable / revenue X 365
What does creditor days measure
How quickly the business pays its suppliers
Creditor days calculation
Trade payables / cost of sales X 365
what do gearing ratios measure?
The amount of Lon term finance for the business that is made up of loans
Gearing ratio calculation
Non-current liabilities / capital employed X 100 OR non-current liabilities / shareholders funds
What does debt to equity measure?
Compares long term liabilities with share capital and retained profit
Debt to equity calculation
Debt / equity
What does interest cover measure?
Whether a business can pay any loans, measure the number of times it can pay with its operating profit
Interest cover calculation
Operating profit / interest payable
What do efficiency ratios measure?
The ability of a business to manage its assets and liabilities effectively
What does asset turnover measure?
How efficiently the business uses its non-current assets to generate revenue
Asset turnover calculation
Revenue / non current assets
What does stock turnover measure?
How quickly stock is sold
Stock turnover calculation
Sales / average stock
(Average stock = opening + closing stock / 2
What does gross profit margin measure?
The level of profit as a percentage of sales, but only considers costs of production (direct)
Gross profit margin calculation
Gross profit / sales X 100
What does net profit margin measure?
Profit as a a percentage of sales, taking all costs into account
Net profit margin calculation
Net profit / sales X 100
What does ROCE measure?
Net profit as a percentage of the capital employed
ROCE calculation
Operating profit / capital employed X 100
