formulas Flashcards
Weighted Average Contribution Capital (WACC)
(debt weighting x after-tax Rl) + (Equity weighting x RE)
Rl = required rate of return on debt (liabilities)
RE = required rate of return on equity
leverage
leverage (or gearing) is a measure of the extent to which the entity utilises debt to finance its assets.
= interest bearing liabilities / total assets x 100
amount of debt (interest bearing liabilities) / total assets (interest bearing liabilities + E) x 100
Return on equity
(profitability indicator)
Rate of which management has taken capital from shareholders and turned it into net profit.
profit available to ordinary shareholders/ ordinary shareholders’ equity x 100. (?)
return on assets
(profitability indicator)
The ability of the entity to utilise its resources to generate returns.
EBIT/ATA x 100
gross profit margin
(profitability indicator)
an indicator of (but not the same as) mark-up
gross profit / sales revenue x 100
mark up %
gross profit / cost of sales
EBIT profit margin
(profitability indicator)
the rate at which sales revenue generates EBIT
net profit / sales revenue x 100
cash flows to sales ratio
(profitability indicator)
The rate at which sales revenue generates operating cash flow.
net operating cash flows / sales revenue x 100
asset turnover
(efficiency ratio)
Indicates the effectiveness of the entities assets to generate sales revenue, how well the entity is managing its investment in current and non current assets.
sales revenue / ATA x 100
ROA (link)
PM. x ATO
inventory turnover
(efficiency ratio)
The avg. number of days inventory is held i.e. number of days b/w purchase and sale.
average inventory x 365 / cost of sales = n days
days sales outstanding
(efficiency ratio)
average trade receivables x 365 / sales revenue = n days
days purchases outstanding
(efficiency ratio)
average trade payables. x 365 / (cost of sales + net increase in inventory)
current ratio
(liquidity ratio)
current assets / current liabilities
quick ratio
(liquidity ratio)
cash + receivables / current liabilities - overdrafts
cash flow ratio
(liquidity ratio)
The amount of operating cash flow available to service current liabilities.
net operating cash flow / current liabilities = n times
debt ratio
(capital structure)
The extent to which the entity has used debt to finance its investment in assets.
Total liabilities / total assets x100
equity ratio
measures the dollar of equity per dollar of assets.
total equity / total assets x 100
debt to equity ratio
measures the dollar of liabilities per dollar of equity.
Total liabilities / total equity x 100
interest coverage ratio / times interest earned
(capital structure)
The ability of the entity to generate earnings to cover financing costs
EBIT / finance costs = n times
Debt coverage ratio
(capital structure)
Measures the entity’s capacity to remain solvent in the longer term.
non current liabilities / net operating cash flow = n times
expense ratio
(profitability indicator)
Rate at which sales revenue is absorbed by a particular expense or cost centre.
selling and marketing expenses / sales revenue x 100 = n%
Earnings per share
(market performance ratios)
Profit available to ordinary shareholders / average no. of ordinary shares on issue = n cents per share
dividend payout ratio
The percentage of profits distributed as dividends to shareholders.
dividends per share / earnings per share = n %. ??????
price earnings ratio
The number of years of earnings the market is prepared to pay for the entities shares.
current market price/earnings per share
net tangible asset backing per share
Measures the book value of the entities net tangible assets (as reported in the balance sheet) per ordinary share on issue.
ordinary shareholders’ equity - intangibles / average no. ordinary shares on issue = n cents per share
breakeven point in units
fixed costs / contribution margin per unit
breakeven point in $ sales
fixed costs / Contribution margin ratio
contribution margin ratio
CM per unit / selling price per unit
desired profit ->
sales volume (units) to earn desired profit
fixed costs + desired profit before tax / contribution margin per unit
margin of safety formula
expected sales volume less break even volume / expected volume of sales
profit
contribution margin less fixed costs
break even for multiple products
break even units = fixed costs / WACMU
-> apply sales mix to the break even units to get the break even units for each product
WACMU:
1.calculate sales mix ratio:
e.g. Product A/Total Product
WACM = sales mix ratio x CMU
…. add them all together
WACMU = WACM(A) + WACM(B) + WACM(C)
desired profit question: multiple products
no. of units to earn desired pre tax profit:
Fixed costs + desired profit / WACMU
