Financial Ratios Flashcards
How to calculate gross profit margin:
(Gross profit/Sales turnover) x 100
What might a low gross profit margin mean?
Using a low price strategy
Not many sales
Need to use cheaper supplies
How to calculate net profit margin:
(net profit/sales revenue) x 100
How to calculate current ratio :
(current assets/current liabilities) : 1
What is the ideal ratio value?
1.5 : 1
What do the values mean for this ratio?
Low, illiquid
High, missing out on opportunities to spend cash
How to calculate return on capital employed:
((net profit before tax/(total equity + non current liabilities)) x 100
What is the ideal value?
20-30%
What do the values mean for ROCE?
The higher the better
More dividends, better for shareholders
How to calculate inventory turnover?
goods sold / inventories
What do the values mean for inventory turnover?
how quick stock is turned into sales
Bigger figure means sold more quickly, this is better for cash flow
Dependent on industry
How to calculate receivables days:
Receivables/revenue (x 365)
What is the ideal value for receivables days?
30 days
What do the values mean for receivables days?
Lower number, more efficient
Should reduce credit terms to lower number
How to calculate payable days?
Payables / cost of sales ( x 365)
What do the values mean for payable days?
How quickly suppliers are paid
Higher value may suggest you have an issue paying
Want to hold onto cash longer, this also accrues interest
How to calculate gearing:
(non-current liabilities / capital employed ) x 100
What do the values mean for gearing?
How much capital employed comes from long term liabilities
50% + high gearing
Lower gearing, more capital from shareholders
Interest on payment - issue if economy slows
What are the limitations of ratios?
Don’t take into account qualitative info
Internal factors such as culture can impact performance
Ratios don’t forecast or anticipate future changes
