FInancial indicators and profitablility Flashcards

1
Q

Profitability

A

The ablility of a business to earn a profit by comparing its profit against a base such as sales assets or owners equity

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2
Q

Net profit margin

A

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
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3
Q

Expense control

A

the firm’s ability to manage its expenses so that they are not increasing at a faster rate than revenue is increasing.

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4
Q

Asset turnover

A

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
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5
Q

Benchmarks

A
  1. Past performance
  2. Budgeted performance
  3. industry averages

Trend = a pattern that has formed over time

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6
Q

Return on assets

A

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
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7
Q

Gross profit margin

A

( 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

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8
Q

Return on owners investment

A

( 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
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9
Q

Cash flow cover

A

( 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)
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10
Q

Working capital ratio

A

( 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
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11
Q

Quick asset ratio

A

( Current assets -( inventory + payments) / current liabilities = _____ : 1

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12
Q

Debt ratio

A

(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

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13
Q

Inventory turnover

A

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

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14
Q

Account payable turnover

A

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

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15
Q

Accounts receivable turnover

A

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

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