FInancial indicators and profitablility Flashcards
Profitability
The ablility of a business to earn a profit by comparing its profit against a base such as sales assets or owners equity
Net profit margin
A profitability indicator that assesses expense control by calculating the percentage of net sales revenue that is retained as Net Profit
Net profit / Net sales * 100 = ___ %
Can be imroved by
- Buying cheaper supplies
- Buying in bulk
- Rostering more efficently
- Effectieve marketing
- Improve the service
Expense control
the firm’s ability to manage its expenses so that they are not increasing at a faster rate than revenue is increasing.
Asset turnover
An efficency indicator that measures how productivly a business has used it assets in the generation of sales revenue
Net sales / Average Total Assets = _____ Times per period
Can be improved by
- Increased sales at a rate that is quicker than the value of the assets held by the firm
- Decrease in the assets held by the business while the sales remain the same
Benchmarks
- Past performance
- Budgeted performance
- industry averages
Trend = a pattern that has formed over time
Return on assets
This is a profitability indicator that assesses how effectivly a business uses its assets to earn a profit
Net profit / Avg total assets * 100 =_____ %
It can be improved by
- Boosting sales
- Expense control
- Reducing expenses
Gross profit margin
( Gross Profit / Net Sales ) * 100 = _____%
A profitablility indicator that measures the average markup by calculating the percentage of net sales revenue that is retained as gross profit
Causes of change:
Increased selling price while the cost remains the same or increases at a lower rate
Decrease in the cost price whilethe selling price remains stable or increases at a lower rate
Return on owners investment
( Net profit / Average captal ) * 100
Measures how efficently the business uses the owners capital to make a profit -> used by the owner to determine how good of an investment the business is
Can be improved by
- Increasing net profit
- Increase revenue by either putting prices up and improving the service or by increasing the number of sales through advertising
- Decrease expenses through buying in bulk, re-rostering, paying less rent
- Decreasing average capital
- Drawings
Cash flow cover
( Net cash flows from operating / average current liabilities ) = _____ times per period
Measueres how long it takes for the business to generate their current liabilities from their operating cash flows
Can be improved by
- Increasing net cash flows from operating
- Increase fees (improve service)
- Increase the number of sales (advertising)
Working capital ratio
( Current assets / current liabilities ) =_____ : 1
Measures the value of the businesses current assets per $1 current liabilities
Can be improved by
- Increasaing current assets
- Receiving acct payable quicker
- having more cash by selling idle
assets (liquify)
- Decreasing current liabilities
- re - negotiate loans to push
them into the long term
Quick asset ratio
( Current assets -( inventory + payments) / current liabilities = _____ : 1
Debt ratio
(Total liabilities / total assets ) * 100 = _____ %
Measures what percentage of the assets are funded by external sources of finance
Can be improved by decreasing or increasing the value dependant of circumstances
Inventory turnover
An effiecency indicator that measures the average number of days that it takes a business to convert its inventory into sales
(Average inventory / cost of goods sold) * 365 = number of days
Account payable turnover
An efficiency indicator that measures the average time the business takes to settle the obligation it has with an account payable
(Average accounts payable / Net credit purchases (Inc GST)) * 365 = number of days
Accounts receivable turnover
An efficiency indicator measures the average time the business takes to receive payment from accounts receivable.
(Average accounts receivable / net credit sales (Inc GST))_ * 365 = number of days
