Equations for Exam Flashcards
How is Gross Profit Margin calculated?
Gross Profit / Revenue
How is Operating Profit Margin calculated?
Operating Profit (PBIT) / Revenue
How is Return on Equity (ROE) calculated?
Profit after tax / Shareholders’ Equity
How is Return on Capital employed (ROCE) calculated?
Operating Profit / (Long-term liabilities + Equity)
What does Gross Profit margin tell us?
GPM tells us how efficiently a company produces and sells its goods - higher the GPM the more money a company retains from each dollar of sales to cover other expenses
What does the Operating Profit Margin tell us?
OPM tells us how efficiently a company manages its core business operations and is an indicator of operational profitability
What does Return on Equity (RoE) tell us?
How effectively a company uses the money invested by its shareholders to generate profits
What does Return on Capital Employed (ROCE) tell us?
ROCE tells us how effectively a company is using both equity and debt to produce profits
How is the current ratio calculated?
Current Assets / Current Liabilities
What does the current ratio measure?
A company’s ability to pay off its short-term liabilities with its short-term assets
How is the Quick (acid test) ratio calculated?
(Current assets - Inventory) / Current Liabilities
What is the Quick (acid test) ratio a more stringent measure of?
Liquidity
How is the non-current asset turnover ratio calculated?
Revenue / Non-current assets
What does the non-current asset turnover ratio tell us?
How efficiently a company uses its non-current assets to generate revenue
How is inventory turnover calculated?
Cost of Sales / Average Inventory
What does the Inventory turnover tell us?
Tells us how effectively a company can convert inventory into sales
How is inventory turnover in days calculated?
(Average inventory/COGS) x 365 days
What does the Inventory Turnover in days tell us?
Average number of days it takes a company to sell its inventory
How is Trade receivables in days calculated?
(Trade receivables/Revenue) x 365 days
How is Trade Payables in days calculated?
(Trade Payables/COGS) x 365 days
How is dividend per share calculated?
Dividend for the year/ number of shares in issue
How is Earnings per share calculated?
(Profit after tax attributable to ordinary shareholders)/ Number of shares in issue
How is P/E ratio calculated?
Price per share / Earnings per share
How is the gearing ratio calculated?
Long-term Debt / Equity
What does a high level of gearing mean?
A company must pay out relatively high interest - interest is paid out of profits therefore riskier for shareholders
How is interest cover calculated?
PBIT / Interest
