Interps + ratios

Question 1

Profitability equations?

Answer 1

GP - Rev - COS
GPM - Selling price, sales mix

OPM - How well it controls indirect costs

Asset turnover - how managing assets generates revenue

ROCE - how well generates profit using its resources

Question 2

Liquidity equations?

Answer 2

Current ratio: how well CA meets CL

quick ratio: look at overdraft (acid test), compare industry average

Inventory turnover: per annum

Inventory holding period - consider demand and reliability

Receivables collections period - lower days = get cash quickly

payables collections period - no. days taken to pay suppliers

(working capital cycle)

Long period could represent free source of finance

Question 3

Long term financial stability - equations

Answer 3

Gearing - degree of risk

interest cover

Question 4

Investor ratios - equations

Answer 4

EPS

P/E Ratio

Div yield

Div cover

Question 5

GPM

Answer 5

Gross profit / revenue x 100

Question 6

OPM

Answer 6

Profit from ops / revenue x 100

Question 7

asset turnover

Answer 7

revenue / capital employed

Question 8

ROCE

Answer 8

PBT / Capital employed x 100

OPM X asset turnover

Question 9

Current ratio

Answer 9

CA / CL

Question 10

acid test (quick ratio)

Answer 10

CA (Excluding inventories) CL

Question 11

Inventory turnover

Answer 11

COS / Inventory

Question 12

Inventory holding period

Answer 12

inventory / COS x 365

Question 13

Receivables collection period

Answer 13

Receivables / revenue x 365

Question 14

Payables payment period

Answer 14

payables / credit purchases (or COS) x 365

Question 15

Working capital cycle

Answer 15

Inventory days + receivables days - payable days

Question 16

Working capital cycle - what is it

Answer 16

period of time which inventory is funded

shorter WCC indicates higher level of efficiency

Question 17

Gearing

Answer 17

debt / debt + equity x 100

or debt/equity

Question 18

High gearing means?

Answer 18

large proportion of fixed return capital

greater risk of insolvency

proportionately greater returns to shareholders if profits are growing

Question 19

low gearing means?

Answer 19

scope to increase borrowing for potential new projects

borrow more easily

perceived as low risk

Question 20

Increased gearing means>

Answer 20

Issue of loan notes or pref shares treated as liability

assets acquired using lease

trading losses causing reduction in RE

Excessive div which reduces the RE

Question 21

Reduced gearing

Answer 21

repayment of loan notes or pref shares

redemption of convertible debt instruments

trading profits increasing RE

Revaluation of NCA, increasing the reval surplus

Question 22

Interest cover - what is it and calculation?

Answer 22

Profit before interest / Finance costs

Indicates how many times interest costs could be paid from current profit level

used by lenders to assess risk on default

lenders may insist on maintenance of min interest cover as part of loan agreement

Question 23

P/E ratio

Answer 23

Current share price / latest EPS

Question 24

P/E Ratio - what?

Answer 24

represents a measure of market confidence in companies capacity to grow

high pe = high growth expected

Question 25

div yield

Answer 25

Div per share / current share price

Question 26

div cover

Answer 26

PAT / Div

similar to interest cover - how many div could be paid from current profit levels

high cover = current div is able to be maintained