ratio analysis

Question 1

what are the types of ratios?

Answer 1

• profitability
• efficiency
• liquidity
• gearing
• investor

Question 2

profitability ratios

types

Answer 2

• Return on capital employed (ROCE)
• Gross profit margin
• Operating profit margin

Question 3

return on capital employed (ROCE)

equation

Answer 3

operating profit/ capital employed x 100%

Question 4

capital employed

examples

Answer 4

• retained profit
• reservers
• share capital
• share premium
• non-curret liabilities

Question 5

what does ROCE compare?

Answer 5

inputs (capital invested) withoutputs (operaitng profit)

Question 6

Gross profit margin

equation

Answer 6

gross profit/ sales x 100%

Question 7

gross profit margin

definition

Answer 7

measure of profitability in buying and selling goods/ services before other expenses

Question 8

if the cost of raw materials increase what happens to the GP margin?

Answer 8

the GP margin will fall unless selling prices are increased

Question 9

operating profit margin

equation

Answer 9

operating profit/ sales x 100%

Question 10

is it better for the operating profit margin to be high or low?

Answer 10

the higher the better- less than 5% means the company is in a competitive sector or dong badly

Question 11

efficiency ratios

types

Answer 11

• non-current asset turnover ratio
• average recievables collection period
• inventory holding period
• average payables payment period
• net trade cycle

Question 12

non-current asset turnover ratio

equation

Answer 12

sales/ non-current assets = … times

Question 13

non-current asset turnover ratio

definition

Answer 13

how effectively the firm is using its long-term assets to generate sales

Question 14

average recievables collection period

equation

Answer 14

trade recievables/ credit sales x 365 days

Question 15

average recievables collection period

definition

Answer 15

Measures the average time taken to collect money from receivables

Question 16

Normal time
for average recievables collection period

Answer 16

around 45 – 75 days

Question 17

Inventory Holding Period

equation

Answer 17

inventory/ cost of sales x 365

Question 18

Inventory Holding Period

definition

Answer 18

Measures the average time taken to turn inventory intosales

Question 19

whats wrong with inventory holding period?

Answer 19

May be distorted by seasonal factors or by major upturns in sales activity

Question 20

Average Payables Payment Period

equation

Answer 20

trade payables/ credit purchases x 365 days

Question 21

when calculating average payables payment period what can you use when credit purchases are not available

Answer 21

use cost of goods sold

Question 22

Net Trade Cycle

equation

Answer 22

inventory holding period + recievables collection period- payables payment period

Question 23

liquidity ratios

types

Answer 23

• current ratio
• quick ratio

Question 24

current ratio

equation

Answer 24

current assets/ current liabilities

Question 25

quick ratio

equation

Answer 25

current assets less inventory/ current liabilities

Question 26

what is the ideal current ratio

Answer 26

aprox 2:1

Question 27

what does it mean if the current ratio is too high?

Answer 27

too much finance tied up in current assets

Question 28

what does it mean if the current ratio is too low?

Answer 28

concern about meeting current liabilities

Question 29

what is the ideal quick ratio?

Answer 29

approx 1:1

Question 30

gearing

equation

Answer 30

long-term debt/ total capital employed x 100

Question 31

gearing

definition

Answer 31

measure of risk
Ratio of external (borrowed) to internal (equity) long-termfinance

Question 32

interest cover ratio

equation

Answer 32

operating profit/ interest = … times

Question 33

investor

types

Answer 33

• earnings per share (EPS)
• dividend cover

Question 34

earnings per share (EPS)

equation

Answer 34

shareholder’s profit/ total shares in issue

Question 35

dividend cover

equation

Answer 35

profit after tax/ dividends = … times

Question 36

limitations of ratios

Answer 36

-doesn’t explain change
-seasonality
-Deterioration doesn’t necessarily mean bad management