Chapter 34 - Analysis Of Published Accounts Flashcards
Current Ratio
A ratio that compares the current assets with the current liabilities of the business.
Current Ratio Formula
Current Assets / Current Liabilities ( 2 : 1 )
Acid Test Ratio
Compares liquid assets to current liabilities.
Acid Test Ratio Formula
Liquid Assets / Current Liabilities ( Liquid Assets = Current Assets - Inventory ) ( 1.5 :1 )
Profitability
A relative measure of a business’s ability to make profit from sales or a capital investment.
Gross Profit Margin Ratio
A ratio that compares gross profit ( profit before deduction of overhead expenses ) with revenue.
Gross Profit Margin Ratio Formula
Gross Profit / Revenue * 100
Operating Profit Margin
A ratio that compares operating profit for the year with revenue
Operating Profit Margin Formula
Operating Profit / Revenue * 100
Return On Capital Employed
A ratio that compares operating profit and the capital employed in the business
ROCE Formula
Operating Profit ( Net Profit ) / Capital Employed * 100
Capital Employed
The total value of all long-term finance invested in a business.
Methods to increase profit margins
- Reduce direct costs
- Increase Prices
- Cut interest cost
- Reduce overhead costs
Rate Of Inventory Turnover
The number of times in a year that inventory is bought in and sold.
Rate if IT Formula
Cost of sales / Average Inventory
Average Inventory
Inv @ Start + Inv @ End / 2
Trade Receivables Turnover ( Days )
The average time taken ( In days ) to receive payment from customers who have bought products on credit.
Trade Receivables Turnover Formula
Trade Receivables / Credit Sales * 365
Trade Payables Turnover ( Days )
The average time taken in days to pay suppliers for supplies bought on credit.
Trade Payables Formula
Trade Payables / Credit Purchases * 365
Credit Purchases
The value of materials and other supplies bought by a business on credit ( over one year ) .
Gearing Ratio
A ratio that measures the proportion of capital employed in the business that is financed by long-term borrowing (non-current liabilities ).
Gearing Ratio
Non-current liabilities / Capital Employed * 100
Share Price
THe quoted price of one share on the stock exchange.
Dividend
The share of the company profits paid to shareholders.
Dividend Yield Ratio
A ratio that measures the annual return from dividends as a percentage of current market share price.
Dividend per Share
The financial amount received in dividends on one share.
Dividend Yield Ratio Formula
Dividend Per Share / Market Share Price * 100
Dividend Per Share Formula
Total Annual Dividends / Total Number of issued shares.
Dividend Cover Ratio
A ratio that measures how many times dividends could be paid from profit for the year.
Dividend Cover Ratio Formula
Profit For The Year / Annual Dividends
Price Earnings Ratio
The number of years it would take at the current earnings per share to purchase one share at the current market price.
Earnings Per Share
The amount of profit after tax and interest earned per share.
PE Ratio Formula
Market share price / Earnings per share
Earnings Per Share Formula
Profit for the year / Number of shares issued
