Chapter 3 Calculations

Question 1

What are the performance ratios

Answer 1

• return on capital employed
• return on shareholders funds
• gross profit margin
• cost of sales percentage
• operating cost percentage
• Net margin/ operating margin

Question 2

How do you calculate return on capital employed? What is the purpose?

Answer 2

profit (before interest and tax) X 100 / equity + net debt

• effective use of resources

Question 3

How do you calculate return on shareholders funds? What is the purpose?

Answer 3

net profit for the period X 100 / share capital + reserves

• effective use of resources

Question 4

How do you calculate gross profit margin? What is the purpose?

Answer 4

gross profit X 100 / revenue

• assess profitability before taking overheads into account

Question 5

How do you calculate cost of sales percentage? What is the purpose?

Answer 5

cost of sales X 100 / revenue

• assess relationship of costs of revenue

Question 6

How do you calculate operating cost percentage? What is the purpose?

Answer 6

operating costs / overheads X 100 / revenue

• assess relationship of costs to revenue

Question 7

How do you calculate net margin/operating margin? What is the purpose?

Answer 7

profit before interest and tax X 100 / revenue

• assess profitability after taking overheads into account

Question 8

What are the short term liquidity ratios?

Answer 8

current ratio
quick ratio

Question 9

How do you calculate current ratio? What is the purpose?

Answer 9

current assets/ current liabilities

• assess ability to pay current liabilities from reasonably liquid assets

Question 10

How do you calculate quick ratio? What is the purpose?

Answer 10

receivables + current investments + cash / current liabilities

• assess ability to pay current liabilities from most liquid assets

Question 11

what are the long term solvency calculations?

Answer 11

gearing ratio
interest cover

Question 12

How do you calculate gearing ratio? What is the purpose?

Answer 12

net debt/ equity

• assess reliance on external finance

Question 13

How do you calculate interest cover? What is the purpose?

Answer 13

profit before interest payable / interest payable

• assess ability to pay interest charges

Question 14

What are the efficiency calculations?

Answer 14

• net asset turnover
• trade receivables calculation period
• trade payables payment period
• inventory holding period

Question 15

How do you calculate net asset turnover? What is the purpose?

Answer 15

revenue / capital employed

• assess revenue generated from asset base

Question 16

How do you calculate net trade receivables collection period ? What is the purpose?

Answer 16

trade receivables x 365 / credit revenue

• assess average time taken to turn receivables into cash

Question 17

How do you calculate net trade payables payment period ? What is the purpose?

Answer 17

trade payables x 365 / credit purchases

• assess average time taken to pay suppliers

Question 18

How do you calculate inventory holding period ? What is the purpose?

Answer 18

inventory x 365 / cost of sales

• assess average time inventory is held