Basic Ratio Analysis Flashcards
What is the formula for gross profit margin?
Gross profit/sales *100
What is the formula for operating profit margin?
Operating profit/sales *100
What is the formula for return on capital employed?
Operating profit/capital employed *100
What is the formula for capital employed?
Shareholder’s funds + long term liabilities
What is the formula for asset turnover?
Sales/net assets
What is the formula for net assets?
Fixed assets + net current assets
What does the efficiency ratio asset turnover show?
How many times the value of net assets is turned into sales
What is the formula for stock turnover (days)?
Average stock/COS x 365 ays
How is average stock calculated?
(opening stock + closing stock)/2
What does the efficiency ratio stock turnover (days) show?
How long on average stock is held before it is sold
What is the formula for debtors collection period (days)?
Trade debtors/sales (or credit sales) * 365 days
What does the efficiency ratio debtors collection period (days) show?
Sows how long debtors take on average to pay
What are the two short term liquidity ratios?
Current ratio (working capital ratio) or quick/acid test ratio
What is the formula for current ratio?
Current assets/current liabilities
What does current ratio show?
Shows if a business can meet its short-term liabilities with its current assets
What does quick or acid test ratio show?
If a business can meet its short-term liabilities with its current assets
What are the three financing/investment ratios?
Capital gearing ratio, Interest cover (times), Earnings per share (EPS)
What is the formula for capital gearings ratio?
Long term liabilities/long term liabilities + shareholders funds
What does financing/investment ratios show?
Shows how much of the business is financed by long term debt
What is the formula for interest cover (times)?
Operating profit/interest payable
What does interest cover (times) show?
How many times interest payments can be covered with operating profit
What is the formula for earnings per share?
Profit for the year (after tax) / number of issued ordinary shares
What does EPS show?
Shows the profit after tax earned by each share
What does gross profit margin show?
The gross profit as a percentage of sales income?
What does operating profit margin show?
The operating profit (before interest & tax) as a percentage of sales income
What does ROCE show?
How much operating profit is generated as a percentage of the cpital used to generate those profits
What are the stakeholder interests of management?
How the business is performing
What are the stakeholder interests of banks and other lenders?
Is the business a good credit risk?
What are the stakeholder interests of suppliers?
Can the business pay its invoices on time?
What is the calculation of ROCE equal to?
Operating profit margin x Asset turnover
Why is the EPS ratio useful to investors?
It allows investors to compare the returns they can make from different companies
Why is the interest cover ratio useful for banks?
To see if the company is operating within its banking covenants
True or false, a company that is making a loss can have positive cash flows?
True
