Financial ratios

Question 1

What are the profitability ratios?

Answer 1

Gross profit %
Net profit %
Return on Capital Employed

Question 2

Gross profit % ratio?

Answer 2

Gross profit/sales (revenue) x 100

Question 3

What does a decrease in Gross Profit % ratio mean?

Answer 3

More comp in market means lower selling prices & lower profit
Or increase in the cost of purchase

Question 4

What does a increase in Gross Profit % ratio mean?

Answer 4

The company may be in a position to exploit the market & charge higher prices
Higher is better

Question 5

Net profit % ratio?

Answer 5

Net profit/ sales (revenue) x 100

Question 6

What does the net profit ratio indicate?

Answer 6

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

Question 7

ROCE calculation?

Answer 7

Profit before interest charges & tax/share capitol & reserves & borrowings x 100

*long term borrowing only

Question 8

What are the liquidity ratios?

Answer 8

Current ratio

Quick ratio

Question 9

Current ratio?

Answer 9

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

Question 10

Quick ratio?

Answer 10

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

Question 11

Gearing ratio?

Answer 11

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

Question 12

Alternative names for things

Answer 12

Retained earnings = reserves
Non current assets = fixed assets
Trade receivables = debtors

Question 13

Stock turnover ratio?

Answer 13

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

Question 14

Debt turn over ratio?

Answer 14

Sales/debtors

180/30 = 6
Debtors pay 6 times a year or every two months

Question 15

Credit turnover ratio

Answer 15

Purchases/creditors

120/10 = 12
We receive one month credit from our suppliers

Question 16

What are the additional insurance ratios?

Answer 16

Solvency
Liquidity
Capital adequacy
Profitability
Outstanding claims

Question 17

Solvency coverage ratio?

Answer 17

Total eligible capital/solvency capitol requirement

Question 18

Solvency Ratio?

Answer 18

net assets/earned premium net of reinsurance

Higher = stronger company

Question 19

Insurance liquidity ratio?

Answer 19

Total liabilities/cash+investments

The lower the result the greater the liquidity

*opposite to normal liquidity ratio

Question 20

Return on equity in insurance?

Answer 20

Profit after tax/SH’s equity (capital) x 100

The higher the figure the better the return

Question 21

COR?

Answer 21

Claims+expenses+commission costs/earned premium (net of reinsurance) x100

Tracks UW performance rather than profitability
Does not count investment income