ratio analysis Flashcards
what is ratio analysis
a mathematical approach to investigating accounts by comparing two related figures
what is the gross profit margin
gross profit expressed as a percentage of turnover
what is the operating profit margin
operating profit expressed as a percentage of turnover
what is the current ratio
it assesses liquidity by dividing current assets by current liabilities
what is the acid test ratio
a liquidity ratio that excludes inventory from current assets
what is return on capital employed (ROCE)
profit of a business expressed as a percentage of capital employed
what are the two types of ratio analysis
liquidity ratios, profitability ratios
how is gross profit margin calculated
(gross profit ÷ revenue) × 100
how is operating profit margin calculated
(operating profit ÷ revenue) × 100
how is mark-up calculated
(profit per item ÷ cost per item) × 100
what does the current ratio measure
liquidity
how is the acid test ratio calculated
(current assets − inventory) ÷ current liabilities
what does a low acid test ratio indicate
the business may struggle to pay suppliers, risking supply refusal
how is return on capital employed calculated
(operating profit ÷ capital employed) × 100
how is capital employed calculated
non-current liabilities + capital and reserves
