KCB WEEK 3 - RATIOS

Question 1

Three profitability ratios

Answer 1

Return on capital employed
operating profit / capital employed (eq+debt / total ass - current liabs) x 100
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Return on total assets
operating profit / total assets x 100
(non current assets + current assets = total assets)
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Return on shareholder equity
net profit (after all, bottom line) / equity x 100

Question 2

Three profit margins

Answer 2

Gross profit margin = GP/Rev x 100
Operating profit margin = OP/Rev x 100 (OP = GP - admin exp - disb exp)
Net profit margin = NP / Rev x 100 (NP= after tax line)

Question 3

4 gearing ratios (long-term liquidity)

Answer 3

Gearing ratios indicate the power gained from borrowing as a percenrtage / how much is contributed to the company by non-current liabilities
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Total / Capital gearing (%) = (long term borrowing+ preference share cap) / cap employed x 100
337/ (337+323) x 100 =
CAPITAL EMPLOYED = equity + debt + preference share capital OR total assets - current liabilities (equity + debt)
Norm: 30% preferable
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Equity gearing (%) = debt / equity x 100 - #
(Debt + preference share cap x 100) / Equity
Norm: 50% preferable
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NEVER BOTHER WITH EQUITY AND CAPITAL GEARING TOGETHER
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Interest Gearing (%)
(Debt interest +preference share divis) / (op profit + invest income) x 100
Will not usually be given investment income but use if so
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Interest Cover (times) – OP (PBIT) / interest (finance costs) expense + pref share dividends
Closer to 6 / closer to 3
Less than 3 = risky
1 or below – will struggle raise finance/borrow, as unable to service interest from operating profit – sends a bag signal to the market
Low – borrowed too much, interest is too much relative to borrowings – significant portion being used to pay for the borrowings, if anything goes wrong interest payments cannot be covered.

Question 4

2 short-term liquidity rations

Answer 4

Current Ratio
Liquidy (acid/quick) Ratio

Question 5

Asset turnover ratios (times)

Answer 5

Asset turnover= Revenue/Capital Employed (total ass – current liab or equity + debt)
Net asset turnover= Revenue / Total Assets
Non-current asset turnover = Revenue / non-current assets (debt)

Question 6

Working capital management - inventory ratios

Answer 6

Inventory Turnover (times) = COGS/inventory

Inventory Holding period (days) = (inventory/COGS) x 365 days

Inventory is twice inventory turnover

Holding period = days/inventory times

If business carries too much inventory = not good (high / increasing holding period, efficiency for inventory is decreasing)
(times) = COGS/inventory

Question 7

Working capital management - trade payables and trade recievables

Answer 7

Collection period (trade receivables collection period) days = (Trade Recs/credit or rev) x 365
Only credit sales where credit sales made = as from cash sales you do not gain receivables
Ex. 60 days = goods are sold on credit and money is collected after 60 days

Rate of payment of trade payables (days) = (Trade Pays/Credit purchases or COGS) x 365
Where cash AND credit payables = cash will not create a payable so only use credit figure

Where no purchases information provided – USE COGS / cost of sales

Question 8

Calculation of working capital cycle (operating cycle) in days?

Answer 8

Inventory Holding Period + Trade Receivables Period – Trade Payables period
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Where increases one yr to another = working cap management efficiency decreasing