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BMF > M10: Working Capital Management and Ratios > Flashcards

M10: Working Capital Management and Ratios Flashcards

1
Q

Can you calculate the gross margin of a company?

A

πΊπ‘Ÿπ‘œπ‘ π‘  π‘šπ‘Žπ‘Ÿπ‘”π‘–π‘› % = πΊπ‘Ÿπ‘œπ‘ π‘  π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ / 𝑅𝑒𝑣𝑒𝑛𝑒𝑒

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2
Q

What is the mark-up of a company, and can you calculate it?

A

π‘€π‘Žπ‘Ÿπ‘˜ βˆ’ 𝑒𝑝 % = πΊπ‘Ÿπ‘œπ‘ π‘  π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ / πΆπ‘œπ‘ π‘‘ π‘œπ‘“ π‘†π‘Žπ‘™π‘’π‘ 

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2
Q

Can you calculate the net profit margin of a company?

A

𝑁𝑒𝑑 π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ π‘€π‘Žπ‘Ÿπ‘”π‘–π‘› = π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ π‘π‘’π‘“π‘œπ‘Ÿπ‘’ π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ π‘Žπ‘›π‘‘ π‘‘π‘Žπ‘₯ (𝑃𝐡𝐼𝑇) / Revenue

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2
Q

What is the Return on Capital Employed (ROCE) of a company, and can you calculate it?

A

ROCE, also known as the primary ratio, gauges an organisation’s efficiency in generating profits from
its available capital, comprising both debt and equity.

𝑅𝑂𝐢𝐸 = 𝑃𝐡𝐼𝑇 / π‘π‘Žπ‘π‘–π‘‘π‘Žπ‘™ π‘’π‘šπ‘π‘™π‘œπ‘¦π‘’π‘‘

Capital employed = Total assets – current liabilities

or

ROCE = Net profit margin x Asset Turnover

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3
Q

What is the Return on Equity (ROE) of a company, and can you calculate it?

A

ROE is similar to ROCE but looks specifically at the profits made by the organisation for the shareholders.

𝑅𝑂𝐸 = π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ π‘Žπ‘£π‘Žπ‘–π‘™π‘Žπ‘π‘–π‘™π‘–π‘‘π‘¦ π‘“π‘œπ‘Ÿ π‘œπ‘Ÿπ‘‘π‘–π‘›π‘Žπ‘Ÿπ‘¦ π‘ β„Žπ‘Žπ‘Ÿπ‘’β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿπ‘  / π‘‡π‘œπ‘‘π‘Žπ‘™ π‘’π‘žπ‘’π‘–π‘‘π‘¦

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4
Q

What is asset turnover, and can you calculate it?

A

Asset turnover measures a company’s ability to generate sales revenue in relation to its total capital employed (its available assets).

𝐴𝑠𝑠𝑒𝑑 π‘‡π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ = R𝑒𝑣𝑒𝑛𝑒𝑒 / πΆπ‘Žπ‘π‘–π‘‘π‘Žπ‘™ πΈπ‘šπ‘π‘™π‘œπ‘¦π‘’π‘‘

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5
Q

Can you calculate the EPS (Earnings per share) of a company?

A

𝐸𝑃𝑆 =
π‘ƒπ‘Ÿπ‘œπ‘“π‘–π‘‘ π‘œπ‘Ÿ π‘™π‘œπ‘ π‘  π‘Žπ‘‘π‘‘π‘Ÿπ‘–π‘π‘’π‘‘π‘Žπ‘π‘™π‘’ π‘‘π‘œ π‘œπ‘Ÿπ‘‘π‘–π‘›π‘Žπ‘Ÿπ‘¦ π‘ β„Žπ‘Žπ‘Ÿπ‘’β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿπ‘ 
/
π‘Šπ‘’π‘–π‘”β„Žπ‘‘π‘’π‘‘ π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘›π‘’π‘šπ‘π‘’π‘Ÿ π‘œπ‘“ π‘œπ‘Ÿπ‘‘π‘–π‘›π‘Žπ‘Ÿπ‘¦ π‘ β„Žπ‘Žπ‘Ÿπ‘’π‘  π‘œπ‘’π‘‘π‘ π‘‘π‘Žπ‘›π‘‘π‘–π‘›π‘” π‘‘π‘’π‘Ÿπ‘–π‘›π‘” π‘‘β„Žπ‘’ π‘π‘’π‘Ÿπ‘–π‘œπ‘‘

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6
Q

What is the current ratio, and can you calculate it?

A

The current ratio examines an organisation’s ability to meet short-term obligations using its current assets, such as cash, accounts receivable, and inventory, in relation to its current liabilities.

πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Ÿπ‘Žπ‘‘π‘–π‘œ = πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘  / πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 

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7
Q

What is the quick ratio, and can you calculate it?

(aka Acid Test)

A

This ratio provides a more conservative measure of an organisation’s ability to meet immediate financial obligations, by removing inventory.

π‘„π‘’π‘–π‘π‘˜ π‘…π‘Žπ‘‘π‘–π‘œ = (πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘  – π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘–π‘’π‘ ) / πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 

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8
Q

What are the differences between the two ways you have been shown to calculate gearing?

A

First way:

Gearing = Debt Capital / Shareholders funds (Equity)

or

Gearing = Debt Capital / Capital employed

where capital employed = Both debt + Equity

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9
Q

Can you calculate the debt ratio?

A

𝐷𝑒𝑏𝑑 π‘…π‘Žπ‘‘π‘–π‘œ % = π‘‡π‘œπ‘‘π‘Žπ‘™ 𝐷𝑒𝑏𝑑 / π‘‡π‘œπ‘‘π‘Žπ‘™ 𝐴𝑠𝑠𝑒𝑑𝑠
or
𝐷𝑒𝑏𝑑 =𝐷𝑒𝑏𝑑 / 𝐷𝑒𝑏𝑑 + πΈπ‘žπ‘’π‘–π‘‘π‘¦

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10
Q

What is interest cover, and can you calculate it?

A

Interest cover measures a company’s ability to meet its interest expenses, approximating the number of times it can afford to pay interest charges using its profit before interest and tax (PBIT).

πΌπ‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ π‘π‘œπ‘£π‘’π‘Ÿ = 𝑃𝐡𝐼𝑇 / πΌπ‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ π‘π‘Žπ‘¦π‘Žπ‘π‘™π‘’

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10
Q

What are days trade receivables, and can you calculate them?

A

DTR = the approximate number of days it takes for credit customers to settle their invoices.

π·π‘Žπ‘¦π‘  π‘‘π‘Ÿπ‘Žπ‘‘π‘’ π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’π‘  = π‘‡π‘Ÿπ‘Žπ‘‘π‘’ π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’ / πΆπ‘Ÿπ‘’π‘‘π‘–π‘‘ π‘ π‘Žπ‘™π‘’π‘  Γ— 365

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11
Q

What is inventory turnover, and can you calculate it?

A

Inventory turnover calculates how many times the company’s current inventory was sold during the
year.

πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π·π‘Žπ‘¦π‘  =πΆπ‘œπ‘ π‘‘ π‘œπ‘“ π‘ π‘Žπ‘™π‘’π‘  / πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘–π‘’π‘ 

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11
Q

Can you calculate days trade payables?

A

π·π‘Žπ‘¦π‘  π‘‡π‘Ÿπ‘Žπ‘‘π‘’ π‘ƒπ‘Žπ‘¦π‘Žπ‘π‘™π‘’π‘  = π‘‡π‘Ÿπ‘Žπ‘‘π‘’ π‘π‘Žπ‘¦π‘Žπ‘π‘™π‘’π‘  / πΆπ‘Ÿπ‘’π‘‘π‘–π‘‘ π‘π‘’π‘Ÿπ‘β„Žπ‘Žπ‘ π‘’π‘ 
Γ— 365

where Purchases = cost of sales - opening inventory + closing inventory

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12
Q

Can you calculate inventory days?

A

πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π·π‘Žπ‘¦π‘  = πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘–π‘’π‘  / πΆπ‘œπ‘ π‘‘ π‘œπ‘“ π‘ π‘Žπ‘™π‘’π‘  Γ— 365

13
Q

What is the working capital cycle and how do you calculate it?

A

The working capital cycle measures the time it takes for cash to flow from a company’s operations through to inventory, receivables, and finally, cash again.

WCC = π‘‘π‘Žπ‘¦π‘  π‘‘π‘Ÿπ‘Žπ‘‘π‘’ π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’π‘  + π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π‘‘π‘Žπ‘¦π‘  – π‘‘π‘Žπ‘¦π‘  π‘‘π‘Ÿπ‘Žπ‘‘π‘’ π‘π‘Žπ‘¦π‘Žπ‘π‘™π‘’π‘ 

14
Q

What are the components in working capital?

A
  • Inventory
  • Trade receivables
  • Cash
  • Trade payables
15
Q

With regards to inventory control, can you:
- Calculate the economic order quantity?
- Calculate inventory re-order levels?
- Calculate a company’s safety inventory level?
- Calculate maximum inventory levels?
- Calculate average inventory level?

A

EOQ: helps determine the optimal order quantity to minimise the combined costs of ordering and holding inventory.

𝑄 = √2πΆπ‘œπ· / πΆβ„Ž

Where:
D = Demand or usage in units for 1 year
Co = The cost of making one order
Ch = The holding cost per unit of inventory for 1 year
Q = The re-order quantity (i.e. the EOQ)

Re-order level:

Re-order level = lead time demand = max lead time (days) x maximum units used per day

Safety inventory level:

Safety inventory level = re-order level – (average usage x average lead time)

Maximum inventory levels:

Maximum inventory level = re-order level – (minimum usage x minimum lead time) + re-order quantity

Average inventory levels:

Avg = Safety inventory + Order Quantity/2

16
Q

Can you calculate whether a company should accept a discount for buying in bulk?

A

To decide whether it would be worthwhile taking a discount and ordering larger quantities, it needs to minimise the total cost of inventory, which is made of:

Total inventory cost = purchasing costs + ordering costs + holding costs

The optimal order quantity to minimise this total cost will be either:
* The pre-discount EOQ level, or
* The minimum order size necessary to earn the discount

BMF (11 decks)

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