ratio analysis Flashcards
what are the types of ratios?
- profitability
- efficiency
- liquidity
- gearing
- investor
profitability ratios
types
- Return on capital employed (ROCE)
- Gross profit margin
- Operating profit margin
return on capital employed (ROCE)
equation
operating profit/ capital employed x 100%
capital employed
examples
- retained profit
- reservers
- share capital
- share premium
- non-curret liabilities
what does ROCE compare?
inputs (capital invested) withoutputs (operaitng profit)
Gross profit margin
equation
gross profit/ sales x 100%
gross profit margin
definition
measure of profitability in buying and selling goods/ services before other expenses
if the cost of raw materials increase what happens to the GP margin?
the GP margin will fall unless selling prices are increased
operating profit margin
equation
operating profit/ sales x 100%
is it better for the operating profit margin to be high or low?
the higher the better- less than 5% means the company is in a competitive sector or dong badly
efficiency ratios
types
- non-current asset turnover ratio
- average recievables collection period
- inventory holding period
- average payables payment period
- net trade cycle
non-current asset turnover ratio
equation
sales/ non-current assets = … times
non-current asset turnover ratio
definition
how effectively the firm is using its long-term assets to generate sales
average recievables collection period
equation
trade recievables/ credit sales x 365 days
average recievables collection period
definition
Measures the average time taken to collect money from receivables
Normal time
for average recievables collection period
around 45 – 75 days
Inventory Holding Period
equation
inventory/ cost of sales x 365
Inventory Holding Period
definition
Measures the average time taken to turn inventory intosales
whats wrong with inventory holding period?
May be distorted by seasonal factors or by major upturns in sales activity
Average Payables Payment Period
equation
trade payables/ credit purchases x 365 days
when calculating average payables payment period what can you use when credit purchases are not available
use cost of goods sold
Net Trade Cycle
equation
inventory holding period + recievables collection period- payables payment period
liquidity ratios
types
- current ratio
- quick ratio
current ratio
equation
current assets/ current liabilities
quick ratio
equation
current assets less inventory/ current liabilities
what is the ideal current ratio
aprox 2:1
what does it mean if the current ratio is too high?
too much finance tied up in current assets
what does it mean if the current ratio is too low?
concern about meeting current liabilities
what is the ideal quick ratio?
approx 1:1
gearing
equation
long-term debt/ total capital employed x 100
gearing
definition
measure of risk
Ratio of external (borrowed) to internal (equity) long-termfinance
interest cover ratio
equation
operating profit/ interest = … times
investor
types
- earnings per share (EPS)
- dividend cover
earnings per share (EPS)
equation
shareholder’s profit/ total shares in issue
dividend cover
equation
profit after tax/ dividends = … times
limitations of ratios
-doesn’t explain change
-seasonality
-Deterioration doesn’t necessarily mean bad management
