Ratio's Flashcards
What are the performance ratios?
1) Return on Capital Employed (ROCE)
2) Return on Shareholders Funds (ROSF)
3) Gross Profit Percentage Margin
4) Operating Cost Percentage
5) Operating Profit Margin
What are the six categories of accounting ratio’s and where do they relate to on the financial statements?
1) Performance - Income Statement
2) Efficiency - Statement of Financial Position
3) Liquidity - Statement of Financial Position
4) Solvency - Statement of Financial Position
5) Investor - Statement of Financial Position
6) Cashflow - Cashflow
How is return on capital employed calculated and what does it measure?
Return
————————- x 100
Capital Employed
where:
return = profit before interest & tax
capital employed = equity + interest bearing debt - cash
This measures the overall efficiency of a company in employing the resources available to it i.e its Capital Employed.
The higher the answer the better
How is return on shareholders funds calculated and what does it measure?
Profits after Interest and tax
—————————————- x 100
Equity
This measures how effectively a company is at employing funds that the shareholders have provided.
What considerations should be taken into account when drawing conclusions from ROCE & ROSF
1) Target return on the capital
2) Age of Plant (effect of depreciation)
3) Leased/Owned Assets (operating in I/S, finance in SOFP)
4) Whether revaluations have taken place (effect on equity)
How is gross profit margin calculated and what does it measure?
Gross profits
————— x 100
Revenue
This measures the margin earned by a company on revenue, before taking account of overhead costs. Anticipate for this to remain constant year on year.
Possible reasons for changes in the year on year gross profit percentage.
1) Changes in sales prices
2) Changes in sales mix
3) Change in purchase/production costs
4) Inventory obsolescence
How is operating cost percentage calculated and what does it measure?
Operating costs
——————————- x 100
Revenue
Where operating costs = Admin and Distribution costs
This measures the relationship of overheads to revenue.
What are the considerations that should be taken into account for changes in the operating cost percentage?
1) Changes in the amount of sales
2) Non-recurring costs
How do you calculate operating profit margin and what does it show?
Profit before Interest & Tax
—————————— x 100
Revenue
This shows the profit margin after all operating expenses
What are the 4 efficiency accounting ratio’s?
1) Net Asset Turnover
2) Inventory Turnover
3) Trade Receivables Collection Period
4) Trade Payables Payment Period
How is Net Asset Turnover calculated and what does it measure?
Capital Employed
Where capital employed = equity + interest bearing debt - cash
This looks at how good the business is at generating revenue for the size of that business.
The higher the answer the better. Answer = number of times
How is the Inventory turnover calculated and what does it measure?
Inventories
This measures the number of times inventories are turned over each year. The higher the answer the better
ALTERNATIVE CALCULATION
Inventories
————— x 365
Cost of Sales
This measures the number of days on average that an item is in inventories before it is sold. The lower the answer the better.
What are the two implications of high and low inventory turnover rates?
HIGH INVENTORY TURNOVER RATE = May be efficient but the risk of running out of inventory is increased.
LOW INVENTORY TURNOVER = Inefficient use of resources and potential obsolescence problems
How is trade receivables collection period calculated and what does it measure?
Trade Receivables
——————— x 365
Revenue
This measures the average time taken in days to collect the debt from customers
What are the 3 matters that a change in the trade receivables collection ratio could indicate?
1) Bad debt or collection problems
2) Change in the nature of customer base (new customer is big but a slow payer)
3) Change in settlement terms
How is Trade Payables Payment Period Calculated and what does it measure?
Trade Payables
————————————- x 365
Cost of Sales
This measures the average time taken in days to pay suppliers
What are 2 liquidity accounting ratios?
1) Current ratio
2) Quick ratio
How is the current ratio calculated and what does it measure?
Current Assets
——————— expressed as X:1
Current Liabilities
This measures the adequacy of current assets to cover current liabilities. Consider whether you have enough short term assets to pay back your short term liabilities
How is the quick ratio calculated and what does it measure?
Current Assets - Inventories
——————————– usually expressed X:1
Current Liabilities
This eliminates inventories from current assets which are often the slowest moving item, thus giving a better measure of short term liquidity.
What are the 2 solvency accounting ratio’s?
1) Gearing ratio
2) Interest Cover
How is the gearing ratio calculated and what does it measure?
Net Debt (Interest bearing debt - cash)
——————————————– x100
Equity
Gearing measures the relationship between a company’s borrowings (debt) and its share capital and reserves (equity)
How is interest cover calculated and what does it measure?
Interest Payable
This calculates the amount of times profit can cover interest payable
What are the 4 investor accounting ratio’s?
1) Dividend Yield
2) Dividend Cover
3) Price/Earnings (P/E) Ratio
4) Net Asset Value
How is dividend yield calculated and what does it measure?
Dividend Per Share
—————————– x 100
Current Market Price Per Share
This looks at the return the shareholders will be getting back
How is dividend cover calculated and what does it measure?
Dividend Paid
This looks at how many times the dividends can be paid out of profits - can ascertain whether the directors of the company are being generous
How is Price Earnings Ratio Calculated and what does it measure?
Share Price
——————— x 100
Earnings per share
Where earnings per share = profit after interest and tax divided by the number of shares
This is a measure of the market confidence. The higher the better as the market will pay more if they perceive it to be less risky.
How is net asset value calculated and what does it measure?
No of Ordinary Shares in Issue
Where net assets = share capital + reserves
This measures what the shareholders would get if a company was liquidated
What the 5 cash flow accounting ratio’s?
1) Cash Return on Capital Employed
2) Cash From Operations
3) Cash Interest Cover
4) Cash Flow per Share
5) Cash Dividend Cover
How is Cash Return on Capital Employed calculated and what does it measure?
Cash return
———————————————————————- x 100
Capital employed
Where cash return = cash generated from operations + interest received + dividend received
Capital employed = equity + interest bearing debt - cash
This looks at whether good decisions or good management are being turned into cash
How is Cash from Operations calculated and what does it measure?
Cash Generated from Operations
————————————– x100
Profit before interest & tax
Looks at how good the company is at turning the profit into cash
How is Cash Interest Cover calculated and what does it measure?
Interest Paid
Where cash return = cash generated from operations + interest received + dividend received
Looks at how much cash profit has to be paid in interest
How is Cash flow per share calculated and what does it measure?
No of Ordinary Shares
Where cash return = cash generated from operations + interest received + dividend received
This calculates the cash net profit for the year
How is Cash Dividend Cover calculated and what does it measure?
Dividends Paid
It looks at how much cash is avaliable to pay dividends
