FINANCIAL RATIOS Flashcards
Gross profit margin
(gross profit/sales revenue) x 100
Profit margin
(profit/sales revenue) x 100
Return on capital employed (ROCE)
(Profit / capital employed) x 100
What are the 3 profitability ratios
- Gross profit margin
- Profit margin
- Return on capital employed (ROCE)
What are the 2 liquidity ratios?
- Current ratio
- Acid test ratio
Current ratio
current assets / current liabilities
This helps see if the business is liquid
Acid test ratio
(current assets - inventories) / current liabilities
Tougher value of liquidity, inventories removed as stock is the most illiquid current asset
Benefits of ratio analysis
- can compare and observe trends
- can compare with competitors
- Can know key info without looking at full financial statement
Limitations of ratio analysis
- Not accurate for prediction
- Does not factor in external factors
- Only shows financial performance and nothing else e.g. motivation of employees)
- Different firms have different accounting methods, making comparisons difficult
How manager uses business accounts
- decision making
- control operations of a firm (e.g. expansion)
How shareholders use business accounts
- liquidity
- change in profit and value
How lenders use business accounts
- liquidity ratio
- value of existing liabilities
How government uses business accounts
- Will see net profit to ensure accuracy of taxes
How workers use business accounts
- for job security
How other businesses use a businesses accounts
- compare performance
