Chapter 19 - Financial Ratios Flashcards
Return on capital employed (ROCE)
Measures how efficiently a business is using the funds available. It measures how much is earned per $1 invested.
ROCE = Profit before interest and tax/ Capital employed x 100
Profit before interest and tax = Operating profit
Capital employed = Non-current assets + Current assets - Current liabilities
Or
Capital employed = Share capital + Reserves + Long term loans
Return on capital employed
ROCE = Operating profit margin x Asset turnover
Operating profit margin = Operating profit/ Sales revenue
Asset turnover = Sales revenue/ Capital employed
Gross profit margin
Gross profit margin = Gross profit/ Sales revenue
Operating ratios
Operating ratios = Expenses/ Sales revenue
Working capital turnover
Working capital turnover= Sales revenue/ Net working capital
Non-current asset turnover
Non-current asset turnover = Sales revenue/ Non-Current assets
Return on equity (ROE)
Measures how much profit a company generates for its ordinary shareholders with the money they have invested in the company.
ROE = Profit after tax and preference dividends/ (Ordinary share capital + Reserves) x 100%
Where there are no preference shares this is simplified to give:
ROE = PAT/ Shareholders’ funds x 100%
Interest cover
A measure of the adequacy of a company’s profits relative to its interest payments on its debt.
Interest cover = Operating profits before debt interest and tax/ Debt interest
Earnings per share (EPS)
The basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in cents, attributable to each ordinary share.
EPS = Profit after interest, after tax and after preference dividends/ Number of ordinary shares in issue
Price earnings (PE) ratio
The amount the shareholders are prepared to pay for the share as a multiple of current earnings.
PE = Share/ EPS
Dividend per share (DPS)
Helps individual (ordinary) shareholders see how much of the overall dividend payout they are entitled to.
DPS = Total ordinary dividend/ Total number of shares issued
Dividend cover
A measure of how many times the company’s earnings could pay the dividend.
Dividend cover = Profit available for ordinary shareholders/ Dividend for the year
Dividend yield
A direct measure of the wealth received by the (ordinary) shareholder. It is the annual dividend per share expressed as an annual rate of return on the share price.
Dividend yield = DPS/ Market price per share
Total shareholder return
Measures the returns to the investor by taking account of dividend income and capital growth.
TSR = (DPS + change in share price)/ Share price at start of period
Interest yield
The interest or coupon rate expressed as a percentage of the market price.
Interest yield = Interest rate/ Market value of debt
