Financial Statment Analysis Flashcards
Gross profit margin
Expressed as a percentage - the higher the better
Concentrates on costs of making goods and services ready for sale
Small changes in this ratio can be highly significant
There tends to be a normal value for each industry
Gross profit / Sales revenue X100
Operating profit margin
Expressed as a percentage - the higher the better
Reflects the degree of competitiveness in the market and the company’s ability to distinguish products and their ability to control expenses
Includes cost of running the company e.g. facility, rent…
Operating profit / Sales revenue X 100
Return on capital employed
Expressed as a percentage - the higher the better
It measures the performance of a company as a while and it is a measurement of management efficiency
Compared to the cost of sources of long term finance
Operating profit / Equity + non current liabilities X 100
Current ratio
Expressed as a ratio, the higher the better
Helps decision makers to understand whether there are sufficient short-term assets present to settle short-term liabilities
They can cover short term obligations e.g. 9:1 - they can cover it 9x over
If the ratio is <1:1 there is normally a need to look closely at cash flow. However, this will depend upon industry norms
However an ability to generate daily cash might make a lower ratio acceptable
Current assets / Current liabilities
Acid test ratio
Expressed as a ratio, higher the better
It helps to understand whether there are sufficiently short-term assets present to settle short term liabilities, inventory is excluded from the calculation
Inventory is less liquid - takes time for invententory to turn into cash
If it required immediately
The ratio is typically expected to be approximately 1:1
Current assets - Inventory / Current liability
Trade receivable settlement period
Expressed as a number or days, the lower the better
Measures the speed with which a company collects cash from their credit customers
The ratio is typically compared with the credit period given to customers, or the normal credit period for the industry
It takes that number of days for the company to collect the receivables
Trade receivable / Sales revenue X 365
Inventory holding period
Expressed as a number of days, the lower the better
A measure of how quickly goods move through the business
Generally the shorter the better but a period which is too short may risk the goods being out of stock
X amount of days to sell inventory
Inventory / cost of sales X 365
Trade payable settlement period
Expressed as a number or days, the higher the better
The trade payable settlement period measures the speed with which a company pays its suppliers
It takes x number of days to pay back suppliers
Paying too fast may cause cash shortages within the business
Paying too slowly may risk a company’s reputation with its supplier. COmpanies must disclose their payment policy in their directors report
The ratio is typically compared year on year and to the credit period offered to them by their suppliers
Trade payables / Cost of sales X 365
If a company has faster paying rate than receiving, long term may put company in a bad position
Gearing
Expressed as a percentage, lower the better
Often quoted in the financial press. A high figure indicates reliance on sources of long term loan finance
Long term loan, includes short term portion of loans, in current liabilities in balance sheet
Also bank overdraft
A low percentage means that a company relies more on equity than debt
Interest payments must always be met
Non current liabilities / Equity + non current liabilities
Interest cover
Expressed as a number of times, the higher the better
Indicates how safe the annual interest payments are in relation to profit
Indicates how many times profits cab fall before the company is unable to cover payments out of the current profits
Operating profit / Interest expense
