Financial Ratios

Question 1

How is Asset turnover calculated?

Answer 1

Revenue/Capital Employed

Reasons for movement:

1. Increase/Decrease in revenue
2. Increase/decrease in Non current assets
3. increase/decrease in working capital

relates to profitability

Question 2

How is return on Capital Employed calculated?

Answer 2

Profit from operations/Capital employed x 100%

Reasons for Movement:

1. Efficiency: movement in asset turnover.
2. Profitability: movement in operating profit margin
3. Combination of both

Relates to Profitability

Question 3

How are the current and Quick ratio calculated?

Answer 3

Current - Current assets/Current liabilities
Quick - Currant assets less inventory/current liabilities

Movement will relate to changes in Cash, inventory, receivables and Payables.

this relates to liquidity.

Question 4

how are inventory turn over and inventory holding calculated?

Answer 4

Inventory turn over - COS/Inventory
Inventory olding - Inventory/COS x 365 days

Higher turnover and lower days = better efficiency.

Question 5

How is the working capital cycle calculated?

Answer 5

Inventory days + Receivables days - payables days

Question 6

How is financial gearing calculated and what does it tell us?

Answer 6

Gearings = Debt/(Debt+Equity) x 100%

Debt - All long term borrowing
Equity - all elements of equity inc NCI

High gearing - Lots of Fixed return capital, greater risk of insolvency, proportionately greater returns if profits are growing.
Low Gearing - Scope to increase borrowing, Borrow more easily, received as lower risk.
Movement may be caused by:
1. Issue/Repayment of loan notes and preference shares
2. Assets acquired through lease.
3. Redemption of convertible debt instruments.
4. Trading profits/losses.
5. Excessive dividends - reducing Retained earnings.
6. Revaluations increasing revaluation surplus.

Question 7

How is interest cover calculated and what does it show?

Answer 7

Profit before interest/Finance costs

Used to analyse level of risk on current and future lending.

Question 8

What are investor ratios and how are they calculated?

Answer 8

Earnings per share - Profit available/No. ordinary shares
Price/earnings ratio - Current share price/ Lates EPS - high ratio suggests growth is expected.
Dividend yield - Dividend per share/current share price. can be used as a comparative.
Dividend cover - profit after tax/dividends - high cover indicates current dividend level can be maintained.