C7 - Ratios

Question 1

Gross profit % formula and meaning

Answer 1

Gross profit / sales revenue X 100%

The gross profit as a percentage of sales

Question 2

Expense/revenue % formula and meaning

Answer 2

Specified expense / revenue x 100%

A large expense can be expressed as a percentage of revenue

Question 3

3 types of costs?

Answer 3

Fixed

Variable

Semi variable

Question 4

Operating profit % formula and meaning

Answer 4

Operating profit / revenue x 100%

profit before finance costs and tax

Profit from operations is also known as net profit

Question 5

Return on capital employed formula and meaning

Answer 5

Profit from operations / total equity + NCL x 100%

Or

Operating profit / NCA + NA x
100%

How much profit is generated by the capital employed

Question 6

What is return on capital also known as??

Answer 6

Primary ratio

Question 7

Return on shareholders funds formula and meaning?

Answer 7

Profit after tax / total equity X 100%

The return the company is making on their funds as ordinary shares and reserves

Question 8

Working capital formula and meaning

Answer 8

Current assets - current liabilities

Used to finance day to day trading activities

Question 9

Current ratio formula and meaning

Answer 9

Current assets / current liabilities (shown as a ratio)

How many assets a company has to pay short term liabilities

Question 10

Acid / quick ratio formula and meaning

Answer 10

Current assets - inventories / current liabilities (shown as a ratio)

Gives a clear indication of the health of a company’s finance. Doesn’t include inventories as they are least liquid

Question 11

Inventory holding period meaning and formula

Answer 11

Inventories / cos x 365 days

No. Days inventories held on average

Question 12

Inventory turnover formula and meaning

Answer 12

COS / inventories = X times

Number of times a year the inventory is turned over

Question 13

Trade receivables formula and meaning

Answer 13

Trade receivables / revenue x 365 days

How long TR take to pay for the goods sold to them on credit

Question 14

Trade payables meaning and formula

Answer 14

Trade payables / cos x 365

How long it takes for the company to pay for goods on credit

Question 15

Working capital cycle meaning and formula

Answer 15

Inventory days + trade receivable days - trade payable days

Measures the period of time between payment of goods received into inventory and the collection of cash from customers

Question 16

Working capital cycle..

Is it better to have a higher figure or lower figure

Answer 16

Lower

Question 17

Asset turnover meaning and formula

Answer 17

Revenue / NCA = X times
Or
Revenue / Total assets - current liabilities = X times

Measures efficiency of the use of assets in generating revenue.

Question 18

Interest cover meaning and formula

Answer 18

Profit from operations / finance costs = X times

Considers the safety margin of profit over the finance costs of a company.

Question 19

Gearing formula and meaning

Answer 19

Non current liabilities / total quity + non current liabilities x 100%

Or

Non current liabilities / total equity x 100%

How much of the company is financed by non current liabilities such as long term debts and debentures.

Question 20

What is capital employed formula?

Answer 20

Total equity + non current liabilities