Chapter 9 Flashcards
Gross Profit Percentage Ratio
(Gross Profit / Sales) x 100
- decrease may signal lower selling prices
- increase may indicate higher selling prices
Net Profit Percentage Ratio
(Net Profit / Sales) x 100
- if net profit % decreases while gross profit remains the same, it suggests poor expense control
Return on Capital Employed (ROCE) Ratio
(Profit before interest charges and tax / share capital + reserves + borrowings) x 100
Useful Efficiency Ratios
(trade receivables / sales) x 100
(payables / purchases) x 100
(inventory / cost of sales) x 100
Current Ratio
Current Assets / Current Liabilities
Quick Ratio
Current Assets (Excluding Stock) / Current Liabilities
Stock Turnover Ratio
Cost of Sales / Average Stock
Debtor Turnover Ratio
Sales / Debtors
Creditor Turnover Ratio
Purchases / Creditors
Gearing Ratio
(Long-Term Borrowings / Shareholders’ Equity) x 100
Solvency Coverage Ratio
Total Eligible Capital / Solvency Capital Requirement
Solvency Ratio
Net Assets / Earned Premium (Net of Reinsurance)
Liquidity Ratios
Total Liabilities / Cash + Investments
Profitability Ratios
(Profit After Tax / Shareholders’ Equity) x 100
Claims Ratio
(Claims Incurred (Net of Reinsurance) / Earned Premium (Net of Reinsurance)) x 100
Expense Ratio
(Administrative Expenses / Earned Premium (Net of Reinsurance)) x 100
Commission Ratio
(Acquisition Costs / Earned Premium (Net of Reinsurance)) x 100
Combined Ratio
(Claims + Expenses + Acquisition Costs / Earned Premium (Net of Reinsurance)) x 100
Outstanding Claims
(Outstanding Claims (Net of Reinsurance) / Net Assets) x 100
Essential Ratios for Analysis
- claims ratio
- expense ratio
- commission ratio
- combined ratio
- return on equity
- solvency coverage ratio
Uses of Ratio Analysis
- analyse performance
- tracks trends over time
- compare businesses
Limitations of Ratio Analysis
- comparative data is essential
- accounting judgements impact ratios
- financial data quality matters
- past performance doesn’t equal future success
