Interpreting Company Accounts - 10% Flashcards
What is the purpose of ratios
To analyse a company’s financial statements
What are the three profitability ratios ?
- gross profit margin
- operating profit margin
- net profit margin
What is the gross profit margin formula
Gross profit / revenue x 100 = x%
What is the operating profit margin formula
Profit from operations / revenue X 100 = X%
Net profit margin ratios formula
Profit from operations / revenue X 100 = X%
What does the return on capital employed ratio tell us ?
It tells us how well the total capitals employed has been utilised. It judges profits earned in relation to the size of the business
What are the 2 profitability ratios
ROCE - Return on capital employed
Non current asset turn over
Non current asset turn over formula
Turnover / non-current asset x 100 = x%
What does the non current asset turn over tell us ?
- it shows the turnover that is generated from eas $1 worth of assets employed
- the higher the turnover per $1 invested the more efficient the business is.
Return on capital employed formula
Profit from operations / total equity + non current liabilities X 100 = X%
ROCE formula no .2 calculation
Profit from operations / total assets - current liability x 100 = x%
What are the 5 liquidity ratios
Current ratio
Inventory turnover
Quick ratio ( acid test ratio)
Trade receivable collection period
Trade payable payment period
What is the current ratio ?
This ratio should be more than 1:1
It gives an indication of the companies margin of safety
Current ratio formula
Current assets / current liabilities = x:1
What is inventory turnover
This shows the average number of times per year that all inventory is sold
Inventory turn over formula
Cost of sales / inventories = x times
What is the quick ratio ( acid test ratio )
This ratio recognises that inventory takes time to convert to cash. By excluding inventory the ratio is prudent
Quick ratio / acid test ratio formula
Current assets - inventory / current liabilities = x:1
What is trade receivables collection period ?
This shows the average credit period taken by customers
Trade receivable’s collection period formula
Trade receivables / revenue X 365 days = X days
What is a trade payable payment period ?
This shows the average credit period taken from suppliers
Trade payable payment period formula
Trade payable / cost of sales X 365 days = X days
What is gearing ?
Gearing compares how the long term capital of a business is provided though loan, and how much equity ( ordinary shares and reserves figure from the SOFP )
- A low gearing is <50%
-Neutrally geared at 50% - highly geared is >50%
Gearing formula
Non- current liabilities / total equity + non current liabilities X 100 = X%
What is interest cover ?
This shows whether a company its earning enough profits before interest and tax to pay its interest costs comfortably
Interest cover formula
Profit from operations / finance costs = X times
