Ratio Analysis Flashcards
Working Capital
current assets-current liabilities
Current Ratio
Liquidity Ratio
current assets/current liabilities
- Low ratio indicates cash problems (below 1)
- Ratio of 1.5-2 would suggest sufficient management of working capital
- x:1, for every £1 they owe, they own £x
Acid-Test Ratio
Liquidity Ratio
current assets-stock/current liabilities
- Can their ST assets cover their ST liabilities
- Looking for 1:1, if significantly lower than 1, may be cash flow problems (a good warning sign for liquidity problems for businesses who usually hold stock)
Gearing Ratio
Liquidity Ratio
long term liabilities/capital employed x 100
- Breakdown of money in the business
- Measures the proportion of assets invested in a business that are financed by long term borrowing (loans eg)
- Anything over 50%, the business is said to be highly geared, a higher risk to the business.
Interest Cover
Liquidity Ratio
profit before tax and interest OR operating profit/interest
- Have we got enough profit to pay interest?
- Higher figure the better, because it is how many times you can pay the profit
What do efficiency ratios show?
How well the business manages its assets and liabilities.
Debtor Collection Period
Efficiency Ratio
debtors/turnover x 365
- On average, how long it takes for debtors to pay
- Shorter days are better, always round up because gone into next day
- Turnover=revenue
Creditor Payment
Efficiency Ratio
trade payables OR creditors/cost of sales x 365
- Paying the suppliers
- Ideally DCP
Asset Turnover
Efficiency Ratio
revenue OR sales/net assets
-How much money/revenue assets are generating
Non-Current Asset Turnover
Efficiency Ratio
revenue/non current assets
Gross Profit
Profitability Ratio
revenue-cost of sales
Gross Profit Margin
Profitability Ratio
gross profit/sales revenue
- How much gross profit are you getting from sales, the rest is how much is spent on making the product (costs of sales)
- Higher the better
- Tells you what you keep as gross profit once you have deducted the cost of making the product
Net Profit
Profitability Ratio
gross profit-expenses
-Profit for the year
Net Profit Margin
Profitability Ratio
net profit/revenue x 100
- The money you keep in the business of the sale
- Net profit is before tax
Operating Profit Margin
Profitability Ratio
operating profit/revenue x 100
-Profit before you pay costs (tax, interest and dividends)
Capital Employed
Profitability Ratio
share capital+retained earnings+long term borrowing
Return On Capital Employed (ROCE)
Profitability Ratio
operating profit/capital employed x 100
-Tells us what returns (profits) the business has made on the resources available to it
Return On Equity
Profitability Ratio
net profit/shareholders equity
- How much profit is made per £1 of shares
- Higher the better
Dividend Per Share
Shareholder Ratio
total dividends paid/number of ordinary shares in issue
- Higher the better
- Shows return on the share, how much dividend received per share
Dividend Yield
Shareholder Ratio
dividend per share/share price
- In pence
- Dividend per share as a % of the share price
- Shareholders look at dividend yield when deciding to invest or not in the first place
- An unusually high yield might suggest an under-valued share price of a possible future dividend cut
Earnings Per Share (EPS)
Shareholder Ratio
net profit/numbers of shares issued
- Shows how much profit each share has earned over the past year
- Higher = better
Price Earnings Ratio
Shareholder Ratio
market price of share/earnings per share
- Measure of the confidence about what the shares will earn
- Compares the current market price with the earnings that share has made
- The value y means the market price is yx the earnings of that share
Dividend Cover
Shareholder Ratio
profit after tax/dividends
- Dividends is the total dividends paid
- How many times dividends can be paid from net profits
