Financial Ratios

Question 1

GROSS MARGIN

Answer 1

GM% = (Sales – COGS) X 100 / Sales

It tells the percent of every dollar of sales that is available to cover operating expenses and profit

Pharmacies earn higher gross margins when they charge higher prices or buy merchandise less expensively

Question 2

NET INCOME

Answer 2

(Net Income X 100%) / (Sales)

It is a measure of profitability after expenses are considered. It is sensitive to product mix, prescription volume, and type of payers

Question 3

Return on Equity (ROE)

Answer 3

(Net income X 100%) / (Owner’s equity)

ROE measures how effectively funds invested in the firm by its owners or stockholders have been used

Question 4

Return on Assets (ROA)

Answer 4

(Net income X 100%) / (Total assets)

This ratio measures how effectively all funds available to the manager, both debt and equity, have been used. l ROA is a better indicator of a manager’s performance than ROE because it considers

Question 5

Current Ratio

Answer 5

CR = (Current assets) / (Current liabilities)

measures the pharmacy’s ability to repay them on time A rule of thumb suggests that the CR should
be between 2 and 4.
A lower ratio indicates that the pharmacy may
have problems paying current debts on time.

Question 6

Quick Ratio

Answer 6

QR = (Current assets – inventory) / (Current liabilities)

The QR measures the excess of very liquid
current assets – cash and accounts receivable
– to current liabilities.

Question 7

Accounts Payable Payable: APP

Answer 7

APP = Accounts payable/Purchases per day

COGS = BI + P – EI
Where, COGS = Cost of the Goods Sold
BI = Beginning inventory
EI = Ending inventory

indicates how long it takes the
pharmacy to pay for its credit purchases.

Question 8

Debt to equity ratio

Answer 8

(Total debt x 100%) / (Owner equity)

This ratio is the most direct measure of a firm’s financial position It measures the firm’s ability to withstand adversity

Question 9

Accounts Receivable Collection Period: ARCP

Answer 9

ARCP = (Accounts receivable) /
(Net credit sales per day)

is an estimate of the average
number of days it takes the pharmacy to
collect an account receivable

Question 10

Inventory Turnover Rate

Answer 10

COGS = BI + P – EI
Where, COGS = Cost of the Goods Sold
BI = Beginning inventory
EI = Ending inventory
l Inventory Turnover (ITO): Purchases
(BI+EI)/2

Question 11

Asset Turnover: ATO

Answer 11

ATO = (Sales) / Total Assets

Question 12

Personal Expense per Patient Day

Answer 12

Personal Expense per Patient Day =
(Total annual pharmacy payroll) /
(Annual patient days)

Question 13

Drug expense per patient day

Answer 13

Drug expense per patient day =
(Total annual drug expense) /
(Annual patient days.)

Question 14

Generic Fill Ratio (GFR)

Answer 14

GFR = (Number of prescriptions dispensed
with the generic product)/(Total number of
prescriptions dispensed)

Question 15

DuPont Model of Profitability

Answer 15

NI x Sales x TL + OE

Sales Total assets OE