Key Ratios

Question 1

Gross Profit Ratio

Answer 1

Profit Margin as a % of Sales

Gross Profit/Turnover x100

Question 2

Return on Capital Employed

Answer 2

Overall return the company is achieving on its capital employed

Profit before tax/ Capital & Reserves plus long term liabilites

Question 3

Acid Test/ Quick Ratio

Answer 3

Liquid Assets/Current liabilities

Key as it doesn’t include stock which may be downvalued in a fire sale

Question 4

Working Capital Ratio

Answer 4

Current Assets/Current Liabilities

Indicates whether the company has enough stock, debtors and cash to meet its immediate liabilities

Question 5

Debtors Ratio

Answer 5

Shows the average number of days customers take to pay their invoices:

Debtors/Sales x 365

Question 6

Finished Goods Ratio

Answer 6

Stocks/Cost of Sales x 365

Question 7

Interest Cover

Answer 7

measures the company’s ability to pay interest on money borrowed-

Total profit/interest payments

Question 8

Loan Cover

Answer 8

Provides a measure of the company’s ability to repay its borrowing

Fixed Assets/Med& Long Term debt

Question 9

Gearing

Answer 9

Measures the relationship between debt and equity (capital and reserves)

Long term loans/Share cap+Reserves x100