Financial ratios Flashcards
What are the profitability ratios?
Gross profit %
Net profit %
Return on Capital Employed
Gross profit % ratio?
Gross profit/sales (revenue) x 100
What does a decrease in Gross Profit % ratio mean?
More comp in market means lower selling prices & lower profit
Or increase in the cost of purchase
What does a increase in Gross Profit % ratio mean?
The company may be in a position to exploit the market & charge higher prices
Higher is better
Net profit % ratio?
Net profit/ sales (revenue) x 100
What does the net profit ratio indicate?
The relationship between net profit and gross profit ratios indicates how well a company is managing its business expenses
It shows the profit margin on sales
Higher the better
ROCE calculation?
Profit before interest charges & tax/share capitol & reserves & borrowings x 100
*long term borrowing only
What are the liquidity ratios?
Current ratio
Quick ratio
Current ratio?
Current assets/current liabilities
Ratio of over 2 is needed to maintain creditworthiness (recently 1.5 is acceptable)
Supermarkets could trade on 1 or less - quick turnover of stock
Quick ratio?
Current assets ex stock/current liabilities
Often below 1
Shows what would be left if all debts were paid and all credit collected
If bankers are happy to offer overdraft then ok, if not = trouble
Gearing ratio?
Long term borrowings/shareholders equity x 100
Measure of company’s future
Shows how much financing activity comes through borrowings rather than equity
In recession, low is good
In an expanding economy SH’s rather a high ratio as loans are cheaper than SH’s returns - grow with borrowed money
80% is high, 10% is low
Alternative names for things
Retained earnings = reserves
Non current assets = fixed assets
Trade receivables = debtors
Stock turnover ratio?
Cost of sales/averages stock
120/20 = 6
This means stock is turned over 6 times a year or every 2 months
If reduced stock is slower to turn more cash is tied up in stock
Debt turn over ratio?
Sales/debtors
180/30 = 6
Debtors pay 6 times a year or every two months
Credit turnover ratio
Purchases/creditors
120/10 = 12
We receive one month credit from our suppliers
What are the additional insurance ratios?
Solvency Liquidity Capital adequacy Profitability Outstanding claims
Solvency coverage ratio?
Total eligible capital/solvency capitol requirement
Solvency Ratio?
net assets/earned premium net of reinsurance
Higher = stronger company
Insurance liquidity ratio?
Total liabilities/cash+investments
The lower the result the greater the liquidity
*opposite to normal liquidity ratio
Return on equity in insurance?
Profit after tax/SH’s equity (capital) x 100
The higher the figure the better the return
COR?
Claims+expenses+commission costs/earned premium (net of reinsurance) x100
Tracks UW performance rather than profitability
Does not count investment income
