Financial statement analysis Flashcards
What is the purpose of ratio analysis?
Helps make better decision makings by removing impacts of scale and inflation
Types of ratio analysis
- Profitability ratio
2.Operating profit margin - Return on capital employed
What is the profitability ratio?
How well a company is being run by management
What comes under profitability ratio
- Gross profit margin
- Operating profit margin
- Return on capital employed
What is the gross profit margin and how to work it out?
Production costs, from Income statement
Gross profit/ sale revenue x 100
What is the operating profit margin and how to work it out?
Market competitiveness and companies expense control, from income statement
Operating profit/ sales revenue x 100
What is return on capital employed and how to work it out?
Assess companies profit and capital efficiency, so assess management
operating profit/ Equity + Non current liabilities
x100
What is liquidity ratios?
Judgement of adequency of cash
What are the types of liquidity ratios?
- Current ratios
- Acid test ratio
What are current ratios and how to work them out?
Ability to settle short term liabilities, should be higher than 1:1
Current assets/ current liabilities
What is the acid test ratio and how to work it out?
Similar to current ratios but removes the inventory, typically 1:1
Current assets - inventory / current liabilities
What do the Efficiency ratios show?
info of how the speed the company transforms purchases into sale and then cash
What are the type of efficency ratios
- Trade receivables settlement period
- Inventory holding period
- Trade payable settlement period
What is trade recieveable settlement period and how to work them out?
How quickly customer pays, credit collection. Compared with credit period or normal cp in industry
trade recieveable/ sale revenue x 365
What is inventory holding period and how to work them out?
measures how quick goods move through business, short good but could risk out of stock
inventory/ cost of sales x 365
