Basic Ratio Analysis

Question 1

What is the formula for gross profit margin?

Answer 1

Gross profit/sales *100

Question 2

What is the formula for operating profit margin?

Answer 2

Operating profit/sales *100

Question 3

What is the formula for return on capital employed?

Answer 3

Operating profit/capital employed *100

Question 4

What is the formula for capital employed?

Answer 4

Shareholder’s funds + long term liabilities

Question 5

What is the formula for asset turnover?

Answer 5

Sales/net assets

Question 6

What is the formula for net assets?

Answer 6

Fixed assets + net current assets

Question 7

What does the efficiency ratio asset turnover show?

Answer 7

How many times the value of net assets is turned into sales

Question 8

What is the formula for stock turnover (days)?

Answer 8

Average stock/COS x 365 ays

Question 9

How is average stock calculated?

Answer 9

(opening stock + closing stock)/2

Question 10

What does the efficiency ratio stock turnover (days) show?

Answer 10

How long on average stock is held before it is sold

Question 11

What is the formula for debtors collection period (days)?

Answer 11

Trade debtors/sales (or credit sales) * 365 days

Question 12

What does the efficiency ratio debtors collection period (days) show?

Answer 12

Sows how long debtors take on average to pay

Question 13

What are the two short term liquidity ratios?

Answer 13

Current ratio (working capital ratio) or quick/acid test ratio

Question 14

What is the formula for current ratio?

Answer 14

Current assets/current liabilities

Question 15

What does current ratio show?

Answer 15

Shows if a business can meet its short-term liabilities with its current assets

Question 16

What does quick or acid test ratio show?

Answer 16

If a business can meet its short-term liabilities with its current assets

Question 17

What are the three financing/investment ratios?

Answer 17

Capital gearing ratio, Interest cover (times), Earnings per share (EPS)

Question 18

What is the formula for capital gearings ratio?

Answer 18

Long term liabilities/long term liabilities + shareholders funds

Question 19

What does financing/investment ratios show?

Answer 19

Shows how much of the business is financed by long term debt

Question 20

What is the formula for interest cover (times)?

Answer 20

Operating profit/interest payable

Question 21

What does interest cover (times) show?

Answer 21

How many times interest payments can be covered with operating profit

Question 22

What is the formula for earnings per share?

Answer 22

Profit for the year (after tax) / number of issued ordinary shares

Question 23

What does EPS show?

Answer 23

Shows the profit after tax earned by each share

Question 24

What does gross profit margin show?

Answer 24

The gross profit as a percentage of sales income?

Question 25

What does operating profit margin show?

Answer 25

The operating profit (before interest & tax) as a percentage of sales income

Question 26

What does ROCE show?

Answer 26

How much operating profit is generated as a percentage of the cpital used to generate those profits

Question 27

What are the stakeholder interests of management?

Answer 27

How the business is performing

Question 28

What are the stakeholder interests of banks and other lenders?

Answer 28

Is the business a good credit risk?

Question 29

What are the stakeholder interests of suppliers?

Answer 29

Can the business pay its invoices on time?

Question 30

What is the calculation of ROCE equal to?

Answer 30

Operating profit margin x Asset turnover

Question 31

Why is the EPS ratio useful to investors?

Answer 31

It allows investors to compare the returns they can make from different companies

Question 32

Why is the interest cover ratio useful for banks?

Answer 32

To see if the company is operating within its banking covenants

Question 33

True or false, a company that is making a loss can have positive cash flows?

Answer 33

True