Ratio Analysis Flashcards
What is profitability?
The extent to which a business’ activities yield profit
Ratios analysing profitability
-GPM
-OPM
-ROCE
What are the formulas OPM/GPM?
Operating/gross profit
——————————— x100
Revenue
ROCE formula
Operating profit
———————— x 100
Capital employed
What is liquidity?
A business’ ability to generate enough cash on an appropriate timeframe
How is the current ratio (liquidity) calculated?
Current assets
———————
Current liabilities
What is gearing?
A business’ dependence on borrowing
Gearing formula
Non-current liabilities
—————————— X 100
Non-current liabilities
+
Total equity
What is financial efficiency?
How well the business is managing its key resources
What resources are managed under efficiency?
-inventory (stock)
-receivables (debtors)
-payables (trade creditors / creditors)
What is inventory turnover?
A measure of how frequently, on average, inventory is sold
How is inventory turnover shown
X times per year
Inventory turnover formula
Annual cost of sales
—————————
Inventory
What are receivable days?
A measure of how long, on average, it takes a business to collect money it is owed
How are receivable days presented?
Y days
Receivable days formula
Receivables
————————— x 365
Revenue
What are payable days?
A measure of how long, on average, it takes a business to pay money that it owes
How are payable days presented?
Z days
Payable days formula
Payables
———————— x 365
Cost of sales
