Ratio Analysis Flashcards
Investment Ratios
1) Dividend Payout Ratio - The proportion of earnings that a business pays out to shareholders in the form of dividends.
2) Dividend Yield Ratio - This relates to cash return from a share to its current market value. This can help investors assess the cash return on their investment in the business and compare to other returns in the business.
3) Earnings per share = this relates to the earnings generated by the business and available to the shareholders, during a period to the number of shares in issue.
This is a FUNDAMENTAL measure of shoe performance.. The trend in earnings per share over time is used to help assess the investment potential of a businesses shares
4) Cash generated from operations per share -This provides a good idea to the businesses ability to pay dividends and undertake planned expenditures.
5) Price Earnings Ratio - This relates the market value of a share to the earnings per share.The higher the ratio, the higher the market confidence the business has.
Financial Ratios
These are used to assess the financial health of the business. And can be useful when comparing against the businesses.
The Need For Comparison
It is only when we compare the ratio’s against some ‘benchmark’ that the information can be interpreted and evaluated.
By comparing ratios over time we can see if they have improved or deteriorated.
However… Inflation can lead to an overstatement of profit and understatement of asset values. tracking conditions may be quite different over time. Operating inefficiencies may not be clearly exposed.
It also makes it possible to compare between businesses and survival may depend on the businesses ability to achieve comparable levels of performance. However businesses ,ay have different year ends and therefore trading conditions may not be identical. Competitors may also have different accounting policies.
Ratios can be compared against planned performance and targets the business itself has set.
Profitability Ratios
ROSF - This compares the amount of profit for the period available to the owners with the owners’ average stake in the business during that same period. broadly speaking businesses will want as high a value as possible with this one.
ROCE - This is a fundamental measure of business performance. This measures the effectiveness with which funds have been deployed, again you would want as high a return as possible on this.
OPM - This relates the operating profit for the period to the sales revenue.
GPM - This relates the gross profit of the business to the sales revenue generated for the same period.
Efficiency Ratios
These measure how successfully the various resources of the business are managed.
Average Inventories Turnover Period - This measures the average period for which inventories are being held.
A business will nomad prefer a shorter amount of days because holding inventories has costs. Such as the opportunity cost of using the goods for something more profitable.
Average Settlement Period For Trade Receivables - This calculates how long on average, credit customers take, to pay the amounts that they owe to the business.
Average Settlement For Trade Payables
Sales Revenue To Capital Employed
Sales Revenue Per Employee
Liquidity Ratios
These are concerned with the businesses ability to meet its short-term financial obligations.
Current Ratio - This compares ‘liquid assets’. The higher the ratio the more liquid the business is said to be.
Acid Test Ratio - This represents a more stringent test of liquidity as it excludes inventories. For some businesses, they may not be able to exclude cash quickly and therefore it is important to exclude this asset.
Cash generated from operations to maturing obligations
Operating Cash Cycle
The length of time of buying inventories to actually receiving the cash.
Gearing Ratio
These are concerned with the relationship between equity and debt financing.
