Chapter 8 Flashcards
Profitability ratios? (6)
1 gross profit percentage
2 operating profit percentage
3 return on capital employed
4 return on shareholder funds
5 capital employed
6 expense/revenue percentage
Liquidity ratios? (2)
1 current ratio
2 acid test (quick) ratio
Efficiency ratios? (6)
1 working capital cycle
2 trade receivables collection period
3 trade payables collection period
4 assets turnover (non-current and net assets)
5 inventory holding period
6 inventory turnover
Financial position ratios? (2)
1 interest cover
2 gearing percentage
Gross profit percentage equation?
Gross profit x 100%
Revenue
Purpose of gross profit percentage ratio?
Shows how much profit made for every £1 of sales revenue earned
Operating profit percentage equation?
Operating profit x 100%
Revenue
What is the purpose of operating profit percentage ratio?
Takes into consideration overheads and expenses
Expense/revenue percentage equation?
Expense x 100%
Revenue
Purpose of expense/revenue ratio?
To show how effective the chosen expenses are
Return on capital employed equation?
Operating profit. x 100%
Capital employed
Capital employed = total equity + non-current liabilities
Purpose of ROCE ratio?
Looks at business’ performance compared to its size
Return on shareholder funds equation?
Profit after tax x 100%
Total equity
Purpose of return on shareholder funds ratio?
Useful for ordinary share holders
Current ratio equation?
Current assets
Current liabilities
Purpose of current ratio?
Shows how many times over the company can pay for it’s liabilities using its current assets
Acid test ratio equation?
Current assets - inventories
Current liabilities
Purpose of acid test ratio?
Same as current ratio but minus the inventories as there is a delay in being able to sell them off
Inventory holdings days equation?
Inventory. x 365
Cost of sales
Purpose of inventory holding days ratio?
Shows how effectively the company sells its products
Inventory turnover equation?
Cost of sales
Inventory
Purpose of inventory turnover ratio?
Shows the average number of times the company has sold its total inventory over the period
Receivables collection days equation?
Receivables x 365
Revenue
Purpose of receivables collection days ratio?
Shows how often customers pay the company on average
Payables collection days equation?
Payables. x 365
Cost of sales
Purpose of payables collection days ratio?
Shows how often the company pays its suppliers on average
Working cycle capital equation?
Inventory days + receivables days - payable days
Purpose of working capital cycle ratio?
Shows how well the company is managing its working capital and if it may run into cash shortages
Net asset turnover ratio?
Revenue
Total assets - current liabilities
Non-current assets turnover equation?
Revenue
Non-current assets
Purpose of asset turnover ratio?
Shows how well the company generates revenue with its assets
Gearing percentage equation?
Non-current liabilities
Total equity + non-current liabilities
Purpose of gearing ratio?
Shows how much of the total value of the company is financed through debt
Interest cover equation?
Profit from operations
Interest
Purpose of interest cover ratio?
Shows how many times over the company can pay its interest charges out of its profits
