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.
