Ratio Analysis

Question 1

Working Capital

Answer 1

current assets-current liabilities

Question 2

Current Ratio

Liquidity Ratio

Answer 2

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

Question 3

Acid-Test Ratio

Liquidity Ratio

Answer 3

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)

Question 4

Gearing Ratio

Liquidity Ratio

Answer 4

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.

Question 5

Interest Cover

Liquidity Ratio

Answer 5

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

Question 6

What do efficiency ratios show?

Answer 6

How well the business manages its assets and liabilities.

Question 7

Debtor Collection Period

Efficiency Ratio

Answer 7

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

Question 8

Creditor Payment

Efficiency Ratio

Answer 8

trade payables OR creditors/cost of sales x 365

• Paying the suppliers
• Ideally DCP

Question 9

Asset Turnover

Efficiency Ratio

Answer 9

revenue OR sales/net assets

-How much money/revenue assets are generating

Question 10

Non-Current Asset Turnover

Efficiency Ratio

Answer 10

revenue/non current assets

Question 11

Gross Profit

Profitability Ratio

Answer 11

revenue-cost of sales

Question 12

Gross Profit Margin

Profitability Ratio

Answer 12

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

Question 13

Net Profit

Profitability Ratio

Answer 13

gross profit-expenses

-Profit for the year

Question 14

Net Profit Margin

Profitability Ratio

Answer 14

net profit/revenue x 100

• The money you keep in the business of the sale
• Net profit is before tax

Question 15

Operating Profit Margin

Profitability Ratio

Answer 15

operating profit/revenue x 100

-Profit before you pay costs (tax, interest and dividends)

Question 16

Capital Employed

Profitability Ratio

Answer 16

share capital+retained earnings+long term borrowing

Question 17

Return On Capital Employed (ROCE)

Profitability Ratio

Answer 17

operating profit/capital employed x 100

-Tells us what returns (profits) the business has made on the resources available to it

Question 18

Return On Equity

Profitability Ratio

Answer 18

net profit/shareholders equity

• How much profit is made per £1 of shares
• Higher the better

Question 19

Dividend Per Share

Shareholder Ratio

Answer 19

total dividends paid/number of ordinary shares in issue

• Higher the better
• Shows return on the share, how much dividend received per share

Question 20

Dividend Yield

Shareholder Ratio

Answer 20

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

Question 21

Earnings Per Share (EPS)

Shareholder Ratio

Answer 21

net profit/numbers of shares issued

• Shows how much profit each share has earned over the past year
• Higher = better

Question 22

Price Earnings Ratio

Shareholder Ratio

Answer 22

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

Question 23

Dividend Cover

Shareholder Ratio

Answer 23

profit after tax/dividends

• Dividends is the total dividends paid
• How many times dividends can be paid from net profits