Formula Sheet

Question 1

What is the formula for Return on Equity?

Answer 1

(Profit for the year - preference dividend) / (Ordinary share capital + reserves) x 100%

This ratio measures the profitability of a firm in relation to shareholders’ equity.

Question 2

How is Return on Capital Employed calculated?

Answer 2

Profit from operations (PBIT) / (Total assets – current liabilities) x 100%

or (Total equity + non-current liabilities)

This ratio assesses a company’s efficiency at using its capital.

Question 3

What is the formula for Net / Operating Profit Margin?

Answer 3

Profit from operations/ Revenue x 100%

This ratio indicates how much profit a company makes for every pound of revenue.

Question 4

How is Gross Profit Margin calculated?

Answer 4

Gross profit/ Revenue x 100%

This ratio shows the percentage of revenue that exceeds the cost of goods sold.

Question 5

What does the Expense/Revenue Percentage measure?

Answer 5

Specified expense / Revenue x 100%

This ratio reflects the proportion of revenue that is consumed by specific expenses.

Question 6

Define Asset Turnover (Net Assets)

Answer 6

Revenue / (Total assets – current liabilities) = £ or times

Or
Revenue/ (equity + non current liabilities)

This ratio evaluates the efficiency of a company’s use of its assets to generate sales.

Question 7

What is the formula for Non-Current Asset Turnover?

Answer 7

Revenue / Non-current assets

This ratio measures how efficiently a company uses its non-current assets to generate revenue.

Question 8

How is Asset Turnover (Total Assets) calculated?

Answer 8

Revenue / Total assets

This ratio indicates how effectively a company is using its total assets to generate sales.

Question 9

What does Return on Total Assets measure?

Answer 9

Profit from operations / Total assets x 100%

This ratio assesses a company’s ability to generate profit from its assets.

Question 10

What is the Current Ratio?

Answer 10

Current assets / Current liabilities = X : 1

This ratio indicates a company’s ability to cover its short-term obligations with its short-term assets.

Question 11

Define the Quick Ratio or Acid Test Ratio.

Answer 11

(Current assets – inventories) / Current liabilities = X : 1

This ratio measures a company’s ability to meet its short-term liabilities without relying on the sale of inventory.

Question 12

How is Average Inventory Turnover Period calculated?

Answer 12

Average Inventories/ Cost of sales x 365 days

This metric indicates how long inventory is held before it is sold.

Question 13

What is the formula for Average Inventory Turnover?

Answer 13

Cost of sales / Average Inventories = X times

This ratio shows how many times a company’s inventory is sold and replaced over a period.

Question 14

How do you calculate Trade Receivables Days?

Answer 14

Trade receivables / Revenue x 365 days

This metric indicates the average number of days it takes a company to collect payment after a sale.

Question 15

What is the formula for Trade Payables Days?

Answer 15

Trade payables / Purchases x 365 days

This metric shows the average number of days a company takes to pay its suppliers.

Question 16

Define the Working Capital Cycle (days).

Answer 16

Inventory days + Receivable days – Payable days = no. of days

This cycle measures the time taken to convert current assets and liabilities into cash.

Question 17

What is Gearing?

Answer 17

Non-current liabilities/ (Total equity + non-current liabilities) x 100%

This ratio measures the proportion of a company’s capital that comes from debt.

Question 18

How is Debt/Equity calculated?

Answer 18

(Preference shares + long-term loans) / Shareholders funds x 100%

This ratio compares a company’s total liabilities to its shareholders’ equity.

Question 19

What is the Interest Cover ratio?

Answer 19

Profit from operations / Finance costs = X times

This ratio indicates how easily a company can pay interest on outstanding debt.

Question 20

How is Dividend Cover calculated?

Answer 20

Net profit after tax and preference dividend / Ordinary dividends paid and proposed = X times

This ratio shows how many times a company can pay dividends to its shareholders from its net profit.

Question 21

What is the formula for Dividend Yield?

Answer 21

Dividend per share / Market price per share x 100%

This ratio measures the return on investment for a stock based on its dividend payments.

Question 22

How is Earnings per Share calculated?

Answer 22

Profit after tax and preference dividends / Number of issued ordinary shares

This metric indicates the portion of a company’s profit allocated to each outstanding share of common stock.

Question 23

What does the Price/Earnings ratio indicate?

Answer 23

Market price per share / Earnings per share

This ratio helps assess the relative value of a company’s shares.