Ratio Analysis Flashcards
L - What is the current ratio?
CA/CL
L - What does the current ratio show?
Whether a firm can pay its bills as they fall due, it is a liquidity ratio
L - What is a good current ratio?
1.5 : 1
L - What is the acid test?
CA-Stock/CL
L - What does the acid test show?
Due to the time it takes to turn stock into cash, it is a better measure at showing whether a firm can pay its bills when they fall due, doesn’t include stock
L - What is a good acid test ratio?
1:1
P - What is gross profit margin?
gross profit /turnover x 100
P - What does gross profit margin show?
A %, for every pound of revenue, how much profit, can be improved by increasing prices or reducing direct costs
P - What is net (operating) profit margin
net (operating profit) / turnover x 100
P - What should net profit show?
An improvement over time, a declining figure may indicate problems controlling overheads
P - What is ROCE?
Operating profit/Capital Employed x 100
P - What is capital employed?
total equity + long term liabilities
P - What does ROCE show?
Best profitability ratio, shows profit for every pound invested in the business, should improve over time and compare favourably with other firms in the industry, or UK average.
P - What is a good ROCE?
20% / 30%
P - What is ROE?
Profit for the year / Shareholder’s equity x 100
P - What does ROE show?
Measures how much profit is generated for every £1 of shareholder’s funds
E - What is Asset turnover?
Revenue/Non current assets
E - What does asset turnover show?
How much revenue is generated for every £1 of non current assets - how hard assets are being worked, indicates capacity utilisation
E - What is inventory (stock) turnover?
cost of sales/average stock held
E - How is cost of sales calculated?
opening stock + purchases - closing stock
E - How is average stock held calculated?
opening stock + closing stock / 2
E - What format is inventory stock turnover in?
A number, shows how many times a firm will sell all of its stock each year. Need enough stock but not too much.
E - What is creditor (trade payable) days?
payables/cost of sales x365
E - What does creditor days show?
How many days on average it takes a firm to pay its creditors
E - What is debtor (trade receivable) days?
receivables/revenue x 365
E - What does debtor days show?
How many days on average it takes a firm to collect money.
R/S - What is gearing?
Long term liabilities/Capital Employed x 100
R/S - What does gearing show?
Where a business gets its capital from, the extent to which they are reliant on long term loans
R/S - What is an ideal gearing?
Below 50%
R/S - What is debt to equity?
Long term liabilities/equity x 100
R/S - What does debt to equity show?
Compares the long term liabilities with share capital and retained profit
R/S - What is interest cover?
Operating profit/interest payable (finance cost)
R/S - What does interest cover show?
Measures how many times a business can pay its interest charges with the operating profit it makes - helps a company decide whether to borrow more
R/S - What is a sufficient interest cover?
4 times
S - What is dividend per share?
total dividends / no. of ordinary shares issued
S - What does dividend per share show?
pence, shareholders looking for ST cash want it as high as possible, shareholders looking for LT return may be happy for it to be lower if capital reinvested in company
S - What is dividend yield?
dividend per share/current market price x 100
S - What does dividend yield show?
Shareholders looking for a ST return want high dividend, should be compared to the return you could get elsewhere
S - What is earnings per share?
Net profit for the year/no. of shares issued
S - What does earnings per share show?
Amount earned per financial year - likely that most will be retained to fund future growth
S - What is price earnings ratio?
market price of share/earnings per share
S - What does price earning ratio show?
Often reported in the press, used to compare 2 companies. The higher the PE ratio the higher the market think future earnings will be, share price up.
