Individual Company performance & accounts Flashcards
What are the 4 main profitability measures?
ROE (Return on Equity)
ROCE (Return on Capital Employed)
Operating Margin
Net Margin
What are the 2 main profit volatility measures?
Gearing
Interest cover
What are the 3 main liquidity management measures?
Working capital (current) ratio
Liquidity ratio
What are the 4 main Operational efficiency measures?
Working capital
Debit turnover
Credit turnover
Stock turnover
What is the ROE (Return on Equity) formula trying to show us?
It is all about ordinary shareholder funds. It is a % calculation showing the return of profit from the money invested through the original share issue and retained earnings ie profit kept in the company and not distributed as dividends over the previous years
What is the ROE (Return on Equity) purpose and formula?
Purpose - measures the % return the company is achieving on the funds provided by shareholders
Net profit (after tax/ pref divs)
——————————– X 100
Capital and reserves (shareholders funds)
What is the ROCE (Return on Capital Employed) purpose and formula? ROCE is GROSS!!
This uses profit before interest and tax rather than the net figure in ROE). This is a key business measure, more accurate indicator of profitability. Its not limited to just shareholder funds, it includes all money into the company ie from loans, pref share investment etc.
Purpose - its the percentage return achieve on capital employed in the business
Trading profit (before interest & tax)
-------------------------------------------------------- X 100
Capital employed (net assets)
What is the Operating margin? (gross profit margin)
Profit made after paying the costs of goods sold
Operation margin = Operating profit
———————— X 100
Sales
What is the Net margin? (net profit margin)
Profit made after paying the costs of good sold
Net margin = Net profit after interest & tax
——————————————– X 100
Sales
How is profit volatility measured? and what 2 key calculations are used?
it is measured using financial and operation leverage.
1) Gearing ratio
2) Interest cover
What is gearing and how is it calculated?
Gearing shows the extent that a company is reliant upon borrowed money
Gearing = (long term loans + pref shares + short term loans)
————————————————————————-
(total assets - current liabilities)
What is interest cover and how is it calculated?
Interest cover looks at the same problem as gearing but from a different angle (tested more in AF4)
It shows how well a company can repay debt by stating how many times interest payments are covered by gross profits.
A lower interest cover indicates profits are barely covering interest on debt which would be a worrying trend
Interest cover = Profit before interest and tax
——————————————–
Gross interest payable
What are the 2 key liquid ratios and what do they tell us?
Shows how easily a company can meet a sudden cash call
Working capital (current ratio) - includes stock
Liquidity ratio (acid test) - excludes stock
How is Working capital ratio (current ratio) calculated?
Current ration = Current assets / current liabilities
should be between 1.5 and 2
How is Liquidity ratio (acid test) calculated?
Liquidity ratio = Current assets - stock / current liabilities
Should be above 1
