Financial Ratios Business Management Slide 14 Flashcards
Name the types of financial ratio analysis
1.Liquidity ratios
2.Financial ratios
3.Profitability ratios
4.Activity / Efficiency ratios
What does a liquidity ratio indicate
a firms ability to cover its short term obligations
Eg: pay bills for coming year , cover short term debt
What is a financial ratio concerned about
the relationship between debt and equity and the stability of the business in the longer term.
Name the financial ratio that is an indicator of how highly borrowed a business is
Financial ratios
What is the profitability ratio an indicator of
the firms efficiency of operation
How does profitability ratio indicate the firms efficiency of operation
Relate profit to sales
Relate Profit to the amount of capital invested in the business
What does activity/efficiency ratio indicate
how efficiently the business is managing its working capital.
What is the current ratio formula
Current assets
———————
Current liabilities
Name the types of liquidity ratios
Current ratio
Quick ratio (acid test ratio)
What does a current liquidity ratio measure
the capacity of a business to pay cash when its bills fall due
What is an ideal current liquidity ratio.
2:1
But many business managers on a ratio of 1.5:1 or lower
What is the quick ratio(acid test ratio) formula
Current assets - stocks
———————————
Current liabilities
What does quick liquidity ratio measure
current assets e.g. cash, savings, debtors that can be quickly converted into cash relative to liabilities
What is an ideal quick liquidity ratio
1:1 or greater
What type of ratio is debt/equity %
Financial ratio
What is the formula for debt/equity%
Long term debt
———————- X100
Owners equity
What does debt/equity % measure
the longer term financial stability
Describes the relative proportions of long term debt and owners equity used to fund a business.
What is considered a high debt/equity%
Levels of 50 to 60%
What is the concept of debt/equity%
Financial risk increase as debt/equity increases but financial problems only follow when cash flow is insufficient to meet interest and repayments
What type of ratio in interest cover ratio
Financial ratio
What is the formula for interest cover ratio
PBIT
————
Annual interest
What does interest cover ratio indicate
How many times the interest payable is covered by the profit
Of particular interest to lenders i.e. how vulnerable are the interest repayments to a fall in business profits
What is an ideal interest cover ratio
A ratio of 4 or higher
What type of ratio is gross profit to sales%
Profitability ratio
What is the formula for gross profit to sales%
Gross profit
—————— X100
Sales
What does gross profit to sales % measure
The margin available to cover expenses and profit I.e what is left from sales to cover admin,selling , depreciation etc as well as taxes and provide a profit for owners/shareholders
What type of ratio is net profit to sales %
Profitability ratio
What is the formula for net profit to sales%
Net profit after tax
————————— X100
Sales
What does net profit to sales % measure
•The margin left for distribution to the shareholders/owners and for retention for reinvestment in the business
•i.e. how much of every €1 of sales is left and available to pay shareholders or re invest in the business
What type of ratio is return on equity %(ROE)
Profitability ratio
What is the formula for return on equity % (ROE)
Net profit after tax
—————————
Equity
What does return on equity % measure
performance from the point of view of the shareholders
What type of ratio is stock days
Activity / efficiency ratio
What is the formula for stock days
Average stock x 365
—————————-
Sales (or COS)
What does stock days measure
The number of days that stocks are held in the business
Denominator can be either sales or cost of sales but important that you are consistent in order to compare over time
What type of ratio is inventory(stock) turnover
Activity/Efficiency ratio
What is the formula for inventory (stock) turnover
COS
———
Average stock
What does inventory (stock) turnover measure
The average number of times the stock is turned over
Indicates how good the business is at turning stock into sales revenue
What type of ratio is debtor days
Activity / Efficiency ratio
What is the formula for debtors days
Trade debtors x 365
——————————
Sales
What does debtors days measure
The time taken to receive payment from credit customers (i.e. your debtors)
Also indicates the amount of “credit given”
What type of ratio is creditor days
Activity / Efficiency ratio
What is the formula for creditor days
Trade creditors x 365
——————————
Cost of sales (or purchases)
What does creditor days ratio measure
The time taken to pay suppliers
Also measures the average number of days credit that the business receives
What ratios should be consistent over time with the denominator for comparison over time (can be sales or COS)
Stock Days
Creditor Days
