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
what is the advantage of ROCE
it links profit to the size of the business
how can ratios be used to make comparisons
analyze performance to improve weaknesses, compare performance with competitors, determine market share in comparison to others in the industry
