Ratio analysis

Question 1

Mark-up

Answer 1

(Gross Profit/COGS) x100%

Question 2

Gross Profit Ratio/Margin

Answer 2

(Gross Profit/Sales) x100%

Question 3

Net Profit Ratio/ Margin

Answer 3

(Net profit before tax/ Sales) x100%

Question 4

Return on Capital Employed

Answer 4

(Profit before interest and tax/ average capital employed) x100%
(Sole pro: capital
Partnership: capital a/c bal. +current a/c bal
Limited Co. NCL+Shareholder’s fund (equity))

Question 5

Working Capital/ Current Ratio

Answer 5

(CA/ CL) :1

Question 6

Quick/ Liquid/ Acid test ratio

Answer 6

((CA-Inv)/ CL) :1

Question 7

Inventory turnover (times)

Answer 7

COGS/ Avg. Inv

Question 8

Avg. TR collection period

Answer 8

(Avg TR/ credit sales) x(365days or 12months)

Question 9

Avg TP repayment period

Answer 9

(Avg TP/ credit purchases) x (365days or 12 months)

Question 10

TR turnover (times)

Answer 10

(credit sales/ avg TR)

Question 11

TP turnover (times)

Answer 11

(credit purchases/ avg TP)

Question 12

Earning per share

Answer 12

(net profit after tax - preference dividend)/ number of ordinary shares issued

Question 13

Total assets turnover (times)

Answer 13

sales/ total assets

Question 14

Gearing ratio

Answer 14

[(NCL+preference share capital)/ (NCL+shareholders’ fund)] x100%

Question 15

Dividend cover for ordinary shares (times)

Answer 15

(Net profit after tax - preference dividend)/ ordinary dividend paid

Question 16

Price-earnings Ratio

Answer 16

current price per ordinary share/ earnings per share)

Question 17

Higher mark-up/ gp ratio = ?

Answer 17

sales are more profitable

Question 18

Higher NP ratio=?

Answer 18

greater ability of a business in generating net profits from its sales

Question 19

Higher return on capital=?

Answer 19

more capable the business is of generating profits from its long-term funds

Question 20

Increasing trade receivables turnover=?

Answer 20

the TR are being collected more quickly by the business. Liquidity improved as less cash is being tied up in TRs

Question 21

Shorter TR collection period=?

Answer 21

faster the business is able to collect its TR

Question 22

Increasing TP turnover=?

Answer 22

Ratio increase, TP are being paid more quickly by the business, liquidity improved

Question 23

Shorter avg TP repayment period=?

Answer 23

faster the business settles its TP

Question 24

Increasing inventory turnover=?

Answer 24

business is selling inventory more quickly. Liquidity improved as inv can be turned into cash at a faster rate

Question 25

Higher gearing ratio=?

Answer 25

riskier the business

Question 26

Higher total asset turnover=?

Answer 26

more efficiently the business is using its assets to generate sales revenue

Question 27

Higher earning per share=?

Answer 27

higher potential return from holding shares in the company

Question 28

Higher dividend cover=?

Answer 28

higher ratio= smaller the proportion of profits distributed as dividends by the company

Question 29

Higher Price-earnings ratio=?

Answer 29

investors have a higher degree of confidence in the company’s prospects. AND shares are not cheap