Ratio Analysis Flashcards
What is ratio analysis?
Involves the comparison of financial data to gain insights into business performance
What are the 3 profitabillity ratios?
- Gross profit margin
- Operating profit margin
- Return on capital employed
What is gross profit margin?
Percentage of revenue that is left once the cost of the sales has been paid.
What is operating profit margin?
The difference between revenue, costs of goods sold and other operating costs.
What is meant by return on capital employed?
Tells us what profits the business has made on the resources avaliable to it.
What is the main liquidity ratio?
Current ratio
What is meant by current ratio?
A simple measure of estimating whether the business can pay debts due within one year out of the current assets
What are the 4 main ratios for judging financial efficiency?
- Payable days
- Receivable days
- Inventory turnover
- Gearing
What is meant by payable days?
Estimates the average time it takes a business to settle it’s debts with trade suppliers.
What is meant by receivable days?
Time it takes for trade debtors to settle their bills
What is meant by inventory turnover?
A ratio to assess how efficiently a business is managing its working capital
What is meant by gearing?
Measures the proportion of assets invested in a business that are financed by long term borrowing
What is the calculation for gross profit margin?
Gross profit / sales revenue
What is the calculation for operating profit margin?
Operating profit / sales revenue
What is the calculation for return on capital employed?
Operating profit / capital employed x 100
