CH11 analysis and interpretation

Question 1

What are the three main areas in terms of key ratios?

Answer 1

1. Profitability/efficiency
2. Liquidity
3. Gearing

Question 2

What are the profitability/efficiency ratios?

Answer 2

1. Gross profit margin
2. operating profit margin
3. ROCE
4. asset turnover/ NCA turnover

Question 3

What are the liquidity ratios (short term ability to survive)?

Answer 3

1. Inventory turnover/inventory days
2. TRs collection period
3. TPs collection period

Question 4

What is the gearing ratio (long term ability to survive)?

Answer 4

ratio of debt to equity

Question 5

GP formula

Answer 5

GP = GP/Rev x 100

Question 6

operating profit margin formula

Answer 6

operating profit margin = operating profit (profit before tax AND interest)/rev x 100

May have to add back fin costs to get to PBIT

Question 7

ROCE?

Answer 7

ROCE = operating profit (profit before tax AND interest)/cap employed (which is equity + NC liabilities OR total assets - CLs: including only interest bearing NCL) x100

Question 8

Asset turnover?

Answer 8

Asset turnover = rev/cap employed (which is equity + NC liabilities OR total assets - CLs: including only interest bearing NCL)

Question 9

Inventory turnover

Answer 9

Inventory turnover = COS/inv

Question 10

Inv days

Answer 10

Inv days = Inv/COS x 365

Question 11

TR collection period

Answer 11

TR collection period = TRs/Rev (use only credit sales if possible) x 365

Question 12

TP collection period

Answer 12

TP collection period = TPs/COS Use credit purchases only if possible) x 365

Question 13

Gearing formula

Answer 13

Gearing = debt/equity x 100