Chapter 7: Analysing And Interpreting Financial Statements Flashcards
What is the calculation for working capital?
Accounts recievable + inventories - Accounts payable
Debt to Equity Ratio
Ratio between debt and equity
Define the Return on shareholder funds (ROSF) ratio
The shareholder funds ratio refers to the ratio between shareholder equity and profit generated for the period, this is the return on the investement of the shareholders and the profit generated from trading (reserves).
Equation = Profit for the year/ordinary share capital + reserves * 100
The higher the return the better
What are the profitability ratios?
Return on shareholder funds
Return on capital employed
Operating profit margin
Gross profit margin
What is the return on captial employed (ROCE) ratio?
Fundamental measure of business performance, measures the relationship between operating profit and the average long-term capital invested in a business.
ROCE = Operating profit/share capital + reserves + non current liabilities * 100
Conpares inputs (capital invested) with outputs (operating profit)
What is the operating profit margin ratio?
The operating profit margin ratio is a measure of profitability, it measures output and output and determines the profit margin from trading. High profit sales are high margin indicaeing product quality, whereas low profit margin are likely to stimulate volume.
Operating profit margin = Operating Profit/Sales Revenue * 100
Essentialy the question answered is for every £1 of sales revenue how much operating profit is there, higher is better
A profitability measure
Define the gross profit margin?
The gross profit margin is a measure of profitabilty that contrasts the gross profit (sales revenue - cost of sales) with the sales revenue. It is a measure of profitability in absence of any other deductions
Gross profit margin = Gross Profit/Sales Revenue * 100
This will most likely be detemined by variations in the cost of sales, as ever with profitability higher is better.
What are the common efficiency measures in financial ratios?
Average inventory turnover period
Average settlement period for trade recievables
Average settlement period for trade payables
Sales revenue to capital employed
Sales revenue per employee
What is the average inventory turnover period?
This ratio refers to the time inventories are held before purchase. Generally, the shorter the time frame the inventory store is held the better, therfore it is good practise to have a fast turnover
Average inventories turnover period = Average Inventories Held/Cost of Sales * 365
Average settlement period for trade receivables
The average settlement period is the speed of payment on credited items. Essentialy, how fast customers pay for items.
The calculation: Average settlement period = Average trade receivables/Credit sales revenue *365/12/7
Generally, the quicker the better
Average settlment period for trade payables
An efficentcy ratio, refers to the amount of time taken to to pay purchased goods on credit.
Fomula: Average settlement period for trade payables = Average trade payables/Credit Purchases * 365
Sales Revenue to capital employed
An efficency ratio also known as net asset turnover ratio, generally higher is better and refers to the amount of sales revenue generated by assets
Sales revenue to capital employed = Sales Revenue/Share capital + reserves + noncurrnt liabilities
