financial performance indicators Flashcards
Financial performance Profitability ratios Revenue ratios Cost ratios Liquidity ratios Using ratio figures
What is the purpose of financial performance indicators in business?
They help appraise a business’s performance, often through ratios, to understand and manage business success through decision-making.
What are the main categories of financial ratios?
Profitability, revenue, cost, and liquidity ratios.
How is Gross Profit Margin calculated?
(GrossProfit/Sales)×100
This ratio measures the percentage of sales revenue left after covering the cost of sales.
What can cause a decline in Gross Profit Margin?
Rising costs (e.g., due to inflation) or reduced selling prices to increase market share.
How is Net Profit Margin calculated?
(NetProfit(PBIT)/Sales)×100
This ratio shows the percentage of sales revenue left after all operating costs are deducted.
What does a falling Net Profit Margin indicate?
It could signal higher operating costs or reduced efficiency, affecting overall profitability.
What does Return on Capital Employed (ROCE) measure?
The efficiency of a company in generating profit from its capital employed.
ROCE = (NetProfit(PBIT)/CapitalEmployed)×100. This is crucial for comparing profitability relative to business size.
How do industries affect expected ROCE figures?
Capital-intensive industries, like manufacturing, often have lower ROCE compared to service-based businesses
How is Average Selling Price calculated?
TotalRevenue/NumberofUnitsSold
This ratio shows the average price per unit, helpful for pricing strategy comparisons.
What does Sales per Employee indicate?
It measures the average sales value generated per employee, highlighting productivity.
How is Asset Turnover calculated, and what does it signify?
(Sales/CapitalEmployed) - It measures how efficiently a company uses its assets to generate sales.
What does a high Cost of Sales as a % of Turnover ratio indicate?
Poor cost control, especially if this ratio rises as sales increase.
How is Average Production Cost per Unit calculated?
TotalProductionCosts/NumberofUnitsProduced
This helps assess production efficiency and cost management per unit.
What does the Current Ratio measure?
Whether a company’s short-term assets are adequate to cover its short-term liabilities.
A ratio below 1 could signal liquidity issues.
What does the Average Receivables Collection Period indicate?
The average number of days it takes to collect payments from credit sales.
Longer collection periods can signal cash flow issues.
