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
