Interps + ratios Flashcards
Profitability equations?
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
Liquidity equations?
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
Long term financial stability - equations
Gearing - degree of risk
interest cover
Investor ratios - equations
EPS
P/E Ratio
Div yield
Div cover
GPM
Gross profit / revenue x 100
OPM
Profit from ops / revenue x 100
asset turnover
revenue / capital employed
ROCE
PBT / Capital employed x 100
OPM X asset turnover
Current ratio
CA / CL
acid test (quick ratio)
CA (Excluding inventories) CL
Inventory turnover
COS / Inventory
Inventory holding period
inventory / COS x 365
Receivables collection period
Receivables / revenue x 365
Payables payment period
payables / credit purchases (or COS) x 365
Working capital cycle
Inventory days + receivables days - payable days
Working capital cycle - what is it
period of time which inventory is funded
shorter WCC indicates higher level of efficiency
Gearing
debt / debt + equity x 100
or debt/equity
High gearing means?
large proportion of fixed return capital
greater risk of insolvency
proportionately greater returns to shareholders if profits are growing
low gearing means?
scope to increase borrowing for potential new projects
borrow more easily
perceived as low risk
Increased gearing means>
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
Reduced gearing
repayment of loan notes or pref shares
redemption of convertible debt instruments
trading profits increasing RE
Revaluation of NCA, increasing the reval surplus
Interest cover - what is it and calculation?
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
P/E ratio
Current share price / latest EPS
P/E Ratio - what?
represents a measure of market confidence in companies capacity to grow
high pe = high growth expected
div yield
Div per share / current share price
div cover
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
