Financial Ratios Flashcards
Why do we have financial ratios?
Ratio analysis is the process of comparing and quantifying relationships between financial variables, such as those variables found in the statement of financial position and statement of profit or loss of a company.
Ratios can assist with:
Measuring the achievement of corporate objectives
Investment appraisal
Working capital management
Capital structure
Business valuations.
What is Return on capital employed (ROCE)?
ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per $1 invested.
ROCE uses profit, which is not directly linked to the objective of maximising shareholder wealth.
What is return on equity (ROE)?
ROE gives a measure of how profit a company generates for its ordinary shareholders with the money they have invested in the company.
ROE uses profit, which is not directly linked to the objective of maximising shareholder wealth. It is sensitive to gearing levels – increasing as gearing increases.
What are profit margins?
Profit margins measure how well revenue is converted into profit by the company and can be calculated using any profit figure, e.g. gross profit or operating profit..
How do you calculate ROCE?
Return on capital employed
Operating profit (PBIT) / capital employed x100
How do you calculate ROE?
Profit after tax and preference dividends / (ordinary share capital + reserves) x 100
How do you calculate the gross profit margin?
Gross profit / revenue
How do you calculate operating profit margin?
operating profit / revenue
What is the earnings per share (EPS) Ratio?
This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit attributable to each ordinary share.
EPS does not represent actual income of the shareholder and it uses earnings which are not directly linked to the objective of maximising shareholder wealth.
What is the price/earning (PE) ratio?
A PE ratio gives a basic measure of company performance. It expresses the amount the shareholders are prepared to pay for the share as a multiple of current earnings.
A high PE ratio indicates that investors perceive the form’s earnings to be of high quality – usually a mixture of high growth and/or lower risk expectations.
What is dividends per share (DPS)?
The DPS helps individual ordinary shareholders see how much of the overall dividend pay out they are entitled to.
What is dividend cover?
This is a measure of how many times the company’s earnings could pay the dividend.
The higher the cover, the better the ability to maintain dividends if profits drop.
What is dividend yield?
This is a direct measure of the wealth received by the ordinary shareholder.
What is total share return (TSR)?
This measures the income to the investor by taking account of capital growth and dividend income.
How do you calculate EPS?
Profit after tax and preference dividends / number of ordinary shares issued
