Financial Ratios Flashcards
Definition of Financial ratios
Used to descirbe the calculations aspect of interpretation of financial statements.
The term ratio means the performance indicators include percentages, time periods, as well as ratios in the strict sense of the word.
Profitability
Is the relatioship between profit and sales revenue, assets and capital employed
definition of Liquidity
The stability of the business on a short term basis
Efficiency
The effective and efficient use of assets and liabilities
Capital structure
The stability of the business on a long term basis
Formula for Gross profit margin
Gross profit
—————– x 100
revenue
Formula for Gross profit mark-up
Gross Profit
—————— x100
Cost of sales
Formula for Expenses in relation to revenue
Expenses
————– x 100
Revenue
Formula for Profit in relation to revenue
Profit before tax
———————- x 100
Revenue
Formula for Return on capital employed ( Sole trader )
Profit before Interest
—————————— x100
Capital employed
Formula on capital employed ( Limited Company)
Profit from operations
——————————– x 100
Capital employed
Formula for Net Current assets
Current assets - Current liabilites
Formula for Liquid capital
(Current assets - inventory) - Current Liabilities
Formula for Current Ratio
Current liabilities
Formula for Liquid capital ratio
Current liabilities
Formula for Rate of Inventory Turnover ( days)
Average inventory
—————————- x 365
Cost of sales
Formula for Rate of inventory turnover ( times per year)
Cost of sales
Average inventory
Formula for Trade receivables days
Trade receivables
————————- x 365
Credit sales
Formula for Trade Payable days
Trade payable
——————— x 365
Credit purchases
Formula for Capital gearing
Non-current liabilities
——————————————————————————- x100
Issued share capital + reserves+ Non current liabilities
Limitations In the Use Of Financial Ratios
Retrospective nature of ratios - Based of past performances
Differences In accounting Policies - some previous statements may not of been drawn up on the same basis as those currently being worked on.
Inflation - when comparing year to year
Reliance on standards - relying too heavily on certain standards and ignoring other factors
Other considerations eg. Economic, state of the business, comparing like with like
