Analysis and evaluation of financial information Flashcards
what are the ratios needed for accounting?
Gross profit margin%
mark up%
rate of inventory turnover (times and days)
profit in relation to revenue%
Expenses in relation to revenue%
ROCE%
current ratio :1
liquid capital ratio :1
trade receivable days
trade payable days
capital gearing%
What does ROCE stand for?
return on capital employed
what is the liquid capital ratio also know as?
Acid test
how do you work out gross profit margin?
(Gross profit/ revenue)x100
shows percent of sales that are gross profit
how do you calculate Rate of inventory turn over? (both methods)
times= COS/ average inventory
days= (average inventory/ COS)x365
number of times inventory is restocked or number of days
how do you calculate average inventory?
(opening inventory+ closing inventory)/2
How do you calculate mark up?
(gross profit/COS)x100
percentage added to cost of sales in terms of gross profit
What is the formula for expenses in relation to revenue?
(expenses/revenue)x100
expenses as a percentage of sales
How do you calculate ROCE?
(operating profit/ capital employed)x 100
shows return as a % of capital into the business
what is capital employed?
total amount of capital used for the acquisition of profits by a firm or project
what is operating profit?
profit before tax or interest has been removed
how do you calculate the current ratio?
current assets/ current liabilities
shows current assets over current liabilities
amount of CA to pay CL
what is liquid capital ratio formula?
(CA- inventory)/current liabilities
same as the current ratio but only the most liquid |CA
how do you calculate trade receivable days?
(trade receivables/credit sales)x365
average time a credit customers take to pay a business
how do you calculate trade payable days?
(trade payables/credit purchases)x365
average time a business takes to pay suppliers
how do you calculate capital gearing?
(NCL/capital employed)x100
balance of share capital and loan capital
considering long term stability
What ratios can be used to assess profitability?
Gross profit margin
mark up
profit in relation to revenue
what ratios link to liquidity?
current ratio
acid test
what ratios assess efficiency?
inventory turnover
trade payable days
trade receivable days
what ratios assess capital structure?
Gearing
what is the difference between cash and profits?
cash is physical money held/ available to spend at one point in time
profit is a paper calculation to assess whether a business makes a surplus on expenses
what are the limitations of using ratios to assess a business performance?
it is not current.
ratio analysis does not take into account external factors such as a worldwide recession. ratio analysis does not measure the human element of a firm.
Need some comparison (competitor or industry average)
