ratio analysis Flashcards
what are the efficiency ratio’s?
asset turnover, inventory/stock turnover, creditors, debtors.
what is the formula for asset turnover?
revenue / non-current assets X 100
what does asset turnover tell a business?
shows how much money is generated for ever £1 of non-current assets.
showing how hard they are being worked.
what is stock turnover formula?
cost of sales / average stock held
cost of sales = opening stock + purchases - closing
average stock held = opening + closing / 2
what does stock turnover tell the business?
tells them how many times a firm sells all its stock in one year - this will vary depending on the type of business.
what is the creditor formula?
payables / cost of sales X 365 (days)
what does creditor tell a business?
shows how many days on avergae it takes a firm to pay its creditors.
what is the debtor ratio?
receivables / revenue X365
what does the debtor ration tell a business?
how many days on average it takes a firm to collect its money.
what are the profitability ratio’s ?
gross profit margin, net profit margin, return on capital employed (ROCE) and return on equity (ROE).
what is the formula for gross profit margin?
gross profit / turnover X 100
how do you calculate gross profit?
revenue - cost of sales.
what does the gross profit margin tell a business?
this can be improved by increasing prices or reducing costs. will depend on the type of business.
what is the net profit margin formula?
operating profit / revenue X 100
what should net profit do ?
carry on increasing.
what is the formula for return on capital employed?
operating profit / capital employed X 100
what does ROCE show?
it is the best way for analysing profitability, should improve over time, as decent ROCE is 20-30%.
what is the formula for ROE?
profit for that year / shareholders equity X 100
what does ROE show a business?
measures how much profit is generated for £1 of a shareholders investment.
what are the liquidity ratio’s?
current ratio and acid test ratio.
what is the formula for the current ratio?
current assets / current liabilities
what does the current ratio show you?
whether a firm can pay its bills when they are due.
what is the acid ratio formula?
current assets - stock / current liabilities
what does the acid ratio show u ?
the same as current asset ratio, but it considers the fact that stock takes time to convert into cash, therefore acid test ratio is a more realistic measurement.
what are the risk / solvency ratio’s?
Gearing, debt to equity and interest cover
what is the ratio formula for gearing?
non- current liabilities / capital employed
what is capital employed?
total equity + non-current liabilities.
equity = retained profit and shareholders capital.
what does gearing tell u?
it shows where a business gets its capital from, from looking at the proportion from loans rather than retained profit and shared capital. if a business has a gearing above 50% then they are high geared and vulnerable to changes in interest rates.
what is debt to equity formula?
non-current liabilities / equity X 100
what does dept to equity show?
long term liabilities in comparison to the share capital and retained profit
what are the shareholders ratio’s?
dividend per share, dividend yield, earnings per share, price earning ratio.
what is the formula for dividend per share ?
total dividends / no. of ordinary shares issued
what does dividend per share tell us?
the value of the shares, shareholders who are wanting a quick return will want this number to be as high as possible.
what is the dividend yeild ratio?
dividend per share / current market price X100
what does the dividend yeilds want to be for shareholder?
shareholders want this to be as high as possible.
what is the earning per share formula?
net profit for that year / number of shares issued
what is the formula for price earnings ration?
market price share / earing per share
what is depreciation?
- fall in value of a non-current asset over time,
straight line method for depreciation?
estimated useful life
what is the residual value?
- the residual value is the value of the asset at the end of its useful life ( estimate )
