Ch22 - Ratios Flashcards
Performance Ratios - Revenue
Explain the difference in revenue e.g. new or discontinuted products, new markets entered, promotional activity, lost customers, competitors
Gross Profit Margin
Margin expected on SALES. Excludes costs
Factors affecting it:
Selling prices - unavvoidable
Sales mix
Purchase costs
Production costs
Operating Profit margin
Op Profit/Revenue
Are the changes in line with GPM? or Sales Revenue?
Check the individual expensess
ROCE
PBIT/Op Profit/CE
CE = Equity + NCLs
Or Total assets - Current Liabilities
Shows ability to turn long-term finance into profit. Can be affected by accounting policies e.g. Revaluation surplus can lower ROCE. Measures use of resources.
Compare with: prior year figures, target ROCE, cost of borrowing, other companies
ROCE can increase due to better asset turnover
ROE
PAT/Equity*100
Net asset Turnover
Revenue/Capital employed
Measures efficiency in generating revenue from assets
Relationship
Profit Margin x Asset turnover = ROCE
Position Ratios:
Current ratio, quick ratio (-inventory)
Current of 2:1 is ideal, or 1.5:1
Inventory holding period
Inventory/CoS*365
OR CoS/Inventory = times PA
Working capital cycle
Inventory turnover + receivables - payables
Gearing
Debt/Equity Ratio = Loans + Pref share capital/Share capital+Reserves+NCI
or Debt/Debt+Equity
Interest cover
PBIT/Finance costs = Less than two isn’t good. Low cover means dividends are at risk due to profit being eaten up by interest
Overtrading
Rapid expansion of revenue without long-term capital:
Inventory increasing
Receivables increasing
Cash and liquid assets declining
Payables increasing
Investor Ratios
EPS = Earnings(PAT)/Shares in issue
P/E Ratio = Share price/EPS
Dividend Yield
DPS/Share price, lower = compare to others in the market, low signals expected growth
