Ratio Equations

Question 1

Gross profit ratio

Answer 1

Gross profit / Revenue

Question 2

Operating profit ratio

Answer 2

Operating profit / Turnover

Question 3

ROCE - Return on Capital Employed

Answer 3

Operating profit / Equity + Non-current Liabilities

Question 4

Asset turnover

Answer 4

Turnover / Equity + Non-current Liabilities

Question 5

Inventory holding period

Answer 5

Closing inventory / Cost of sales * 365

Question 6

Trade receivable period

Answer 6

Closing trade receivables / Revenue * 365

Question 7

Trade payable period

Answer 7

Closing trade payables / Cost of sale * 365

Question 8

Current ratio

Answer 8

Current assets / Current liabilities

Question 9

Quick ratio (acid test ratio)

Answer 9

Current assets - inventory / Current liabilities

Question 10

Gearing

Answer 10

Debt / Equity

Loans + overdrafts / Share capital + Reserves

Question 11

Dividend cover

Answer 11

Profit for the year / Dividend

Question 12

Interest cover

Answer 12

Operating profit / Finance cost

Finance cost = Interest payments

Question 13

Break-even point

Answer 13

BEP = Fixed costs + profit / Contribution per unit

Question 14

Accounting rate of return

Answer 14

Average return / Average investment

Av. Investment = Total investment / 2

Question 15

Internal rate of return

Answer 15

If D.F1 = 15%, Total NPV1 = 100, D.F2 = 30%, Total NPV2 = 50

IRR = D.F1 + (NPV1/(NPV1-NPV2)(D.F2 - D.F1)

Question 16

Working capital

Answer 16

Current assets - Current liabilities