Chapter 5: Interpreting financial statements Flashcards
Profitability Ratios
Gross profit margin
Operating profit margin
Net profit margin
Net asset turnover
ROCE
Return on equity
Liquidity ratios
current ratio
quick ratio
receivables collection period
payables payment period
inventory days
inventory turnover
investor ratios
dividend yield
dividend cover
P/E Ratio
Gearing ratios
Gearing Ratio
Debt to equity Ratio
Interest cover
Gross profit margin ratio
Gross profit / revenue
Gross profit = revenue - cos
Operating profit margin ratio
Profit before interest and tax / revenue
Operating profit = profit before interest and tax
Net profit margin ratio
Profit for the year (Profit after Tax) / revenue
Net assets turnover
Revenue / Equity + Non-current liabilities
Equity + non current assets = total assets - current liabilities
Return on capital employed (ROCE)
Operating profit margin x net asset turnover
Operating profit margin = Profit before interest and tax / revenue
Net assets turnover = Revenue / Equity + Non-current liabilities
Measures how much profit is generated for every £ of assets employed
Indicates how efficiently the company uses its assets
ROCE is the only ratio which compared profits to the overall size of the business and is sometimes called the primary ratio
Return on equity Ratio
ROE = Profit after tax / equity
Current ratio
Current assets / current liabilities
Quick ratio
(Current assets - inventory) / current liabilities
Receivables collection period
Trade receivables / credit sales x 365
Payables payment period
Trade payables x credit purchases (or COS) x 365
Inventory days
Inventory / COS x 365
Inventory turnover
COS / inventory
Dividend Yield
Dividend per share / market share price
%
Indicates the return that inventors are receiving on on their investment
Dividend cover
EPS / Dividend per share
EPS = profit after tax / no. of shares
EPS = Earnings per share
or
Earnings (Profit after tax) / Dividends paid
Indicates the number of times profits cover the dividends paid by the company.
Can also be calculated by dividing total earnings (PAT) by the total dividends paid and proposed during the year
P/E Ratio
Share Price / EPS
represents market’s view on future performance of the company
Advantages and disadvantages of high gearing
Advantages
Debt is cheaper than equity
-Interest is fixed while profits grow in times of inflation or economic growth
-Interest is tax deductible
Disadv
-Harder to raise finance
-Lenders unlikely to advance more funds if loans already exist
-Shareholders may not wish to buy shares as more risky
Gearing ratio
Interest bearing debt (exl overdraft, incl pref shares) / TALCL
debt to equity ratio
Interest bearing debt / equity
interest cover ratio
PBIT / interest payable expense
