Analysis Of Accounts Flashcards
Capital employed formula
Share holders equity + non-current liabilities
Define liquidity
The ability of a business to pay back its short term debts
Define profitability
Measurement of the profit made relative to the value of sales achieved
OR
the capital invested in the business
3 profitability ratios
Return on capital employed
Gross profit margin
Net profit margin
Return on capital employed formula
(Net profit / capital employed) x 100
Gross profit margin formula
(Gross profit /Revenue) x 100
Net profit margin formula
(Net profit/revenue) x 100
Define Illiquid
Assets are not easily convertible into cash
Two liquidity ratios
Current ratio
Acid test ratio
Current ratio formula
Current assets/current liabilities
Acid test/liquid ratio formula
(Current assets - Inventories) / Current liabilities
Users of accounts
Managers
Shareholders
Creditors
Banks
Government
Workers and trade unions
Other businesses
Working capital
Current assets - current liabilities
Managers as a user of account
Use the accounts to help them keep control over the performance of each product/division .
Compare ratios either other competitors and with previous years.
Shareholders as a user of accounts
From the income statements , profitability ratios and return on capital employed shareholders can see:
- Whether they should invest in the business by buying shares .
- Also compare the ratios with other companies and with previous years.
- How risky it will be to invest in the company (using liquidity ratios)