Accounting ratios - F2

Question 1

What are the accounting ratios for profitability?

Answer 1

• Gross profit margin – percentage of revenue retained after costs of sales deducted
• Operating profit margin – trading or operating profit in relation to revenue expressed as a percentage
• Profit before tax margin
• Return on capital employed
• Effective tax rate – average percentage of tax charged on pre-tax profits of the business

Question 2

What are the accounting ratios for liquidity?

Answer 2

• Current ratio – compares current assets to current liabilities. A ratio greater than 1 indicates there are more assets than liabilities.
• Quick ratio – compares current assets to current liabilities excluding inventory.

Question 3

What are the accounting ratios for effiency/activity?

Answer 3

• Inventory holding period
• Receivables collection period
• Payables payment period
• Asset turnover – how much revenue is generated from the overall capital invested

Question 4

What are the accounting ratios for capital structure?

Answer 4

• Gearing – measure of risk and guide to long-term solvency of the entity. Long term debt as a percentage of capital employed. Increased gearing indicates increased risk of default on loan finance.
• Interest cover – indicates number of times profits will cover interest.
• Average rate of borrowing
• Dividend cover