Finance - Ratio Analysis Flashcards
What are the types of liquidity ratio?
Current Ratio,gearing & acid test ratio
What does the current ratio measure?
Whether a business can pay its short term liabilities
How do you calculate current ratio?
Current Assets ÷ Current Liabilities
What should the benchmark ratio be for current ratio?
2.50:1
What does the acid test ratio show?
Same as current ratio except it includes inventory, supplies and prepaid expenses are excluded
How do you calculate acid test ratio?
current assets - inventories ÷ current liabilities
What is gearing?
The proportion of capital invested in the business which has come from banks or loans
How do you calculate gearing?
non current liabilities ÷ total equity + non current liabilities
What are the profitability ratios?
ROCE,gross profit margins and operating profit margins
What is ROCE?
Return on capital employed is the operating profit compared with the capital employed
How do you calculate ROCE?
operating profit÷ total equity + non current liabilities X100
How do you calculate operating and gross profit?
Gross/operating profit ÷ sales X100
What does operating profit show?
A measure of the proportion of a companies revenue left over after paying variable costs of production
What are the efficiency ratios?
Inventory turnover, receivable days and payables
What is inventory turnover and how is it calculated?
How quickly inventory is converted into sales
= Costs of goods sold ÷ average inventory x365
