P1 Ratios Flashcards
Uses of ratio analysis
- To review the performance of an organisation over time
- Compare the performance of organisation with specific competitors
- Compare performance with published industry averages
- Use analysis of past performance to help forecast future performance
- Highlight problems in a company
Profitability ratios
Indicator company’s efficiency at generated profits or revenue from available resources
Liquidity ratios
Indicate company’s ability to pay for its liabilities
Management/ activity ratios
Provide information about efficiency of management at controlling the business
Capital risk ratios
Provide information about exposure to risk
Return on capital employed ROCE (primary ratio)
(PBIT / Capital employed) x 100
PBIT also known as
Operating profit
Problem with ROCE
Particularly sensitive to valuation of non current assets
Return on capital employed ROCE measures
The return generated by organisation from available capital > how efficient organisation is at generated profits from its capital
Return on equity (ROE) measures
Profits made by organisation for the shareholders
Return on equity =
(Profit available for ordinary shareholders / Total equity) x 100
Net profit margin =
(PBIT / Revenue) x 100
Net profit margin considers
PBIT as a percentage of revenue
Asset turnover =
Revenue / capital employed
Asset turnover shows
Useful information about efficiency of company at generating revenue from its capital
ROCE =
Net profit margin x asset turnover
If ROCE moves from one year to the next
Should calculate net profit margin and asset turnover to provide more info
Gross profit margin =
Gross profit / revenue x 100
Gross profit margin measures
Ability of the business to sell goods for more than they cost to make
Current ratio =
Current assets / current liabilities
Current ratio assesses
Organisation’s ability to meet its short term debts
Quick ratio =
(Current assets - inventory) / current liabilities
Quick ratio is
Harsher test of liquidity
Days trade receivables
(Trade receivables / credit sales) x 365
Days trade receivables shows
Approx number of days credit customers are taking to pay their debts