Chapter 12: Financial Performance Ratios Flashcards
Gross Profit Margin
Gross Profit / Sales * 100
- Falling margins may be due to increasing costs or reduced selling prices. Sp down or Cos up per unit basis
-Changes in cost of sales for gross profit
-Useful in pricing decisions. Increasing your selling prices relative to the direct costs will result in an increased gross profit margin
Net Profit Margin
Net Profit / Sales * 100
- Falling margins may be due to increasing costs or reduced selling prices. Sp down or Cos up per unit basis
-Changes in profitability due to operating costs for Net profit
-Useful in pricing decisions.
-If you are given profit after interest and tax figures you will need to adjust
Return on capital employed is which two ratios
Asset turnover x Net profit margin
Return on capital employed (ROCE)
Net profit / capital employed (TALCL) * 100
How much profit is generated for every £ of assets employed - how efficiently the company uses its assets.
Only ratio which compares profits to the overall size of the business.
Average Selling Price
Total revenue / number of units sold
-can be compared to competitors
Sales per employee
Sales / number of employees
if ratio falls it may be that staff are not working hard enough
Asset turnover
Sales / capital employed
Good measure of efficiency of the use of total assets that we have invested in.
If business acquired new assets during the last year then this ratio may drop as the new assets will need time to become fully established
Cost of sales as a % of turnover
Cost of sales / Sales *100
If increases as sales increase it may indicate poor cost control and that management are struggling to manage the increasing size of the business.
Ratio falling as sales increase may be due to economies of scale
Cost as a % of sales
Cost / Sales *100
If ratio increases it may indicate that the cost is not being effectively controlled
Average production cost per unit
Material
Labour
Overhead
Total production costs / number of units produced
If ratio increases at more than the rate of inflation it may imply that the business has poor control of production costs which will start to reduce profit margins.
May be as a result of better quality which may allow a better selling price to be charged.
Average Material cost per unit of purchases
Total purchase cost / number of units purchased
Shows average cost of purchase of materials which may be a significant element of the costs of producing each unit
Average Labour rate per hour
Total labour costs / Number of hours paid
Shows average hourly wage rate being paid to staff.
Current Ratio
Current assets / current liabilities
Analyse whether the short-term liquid assets of the business are adequate to cover short-term liabilities
IF this falls significantly from year to year it may indicate that we are having difficulties in cash flow and we may struggle to pay suppliers
Quick or acid ratio
(current assets - inventory) / current liabilities
IF this falls significantly from year to year it may indicate that we are having difficulties in cash flow and we may struggle to pay suppliers
Average receivables collection period (debtor days)
Trade receivables / Sales * 365
-if increases means takes longer to collect debts - consider tightening up credit control or introducing settlement discounts to encourage faster payment
-If we are making more sales to large customers this ratio may increase as these larger customers may be able to negotiate longer credit terms
