Ratios Flashcards
How do you calculate ROCE
Operating profit / Capital employed (total equity + non current liabilities )x 100
How do you calculate the gross profit margin
Gross profit / revenue x 100
How do you calculate the operating profit margin
Operating profit / sales revenue x 100
How do you calculate the current ratio
current assets / current liabilities
How do you calculate the gearing ratio
Long term liabilities / capital employed x 100
How do you calculate stock turnover
Cost of sales / average stock held
How do you calculate receivables
Trade debtors / sales revenue x 365
How do you calculate payables
Trade payables / cost of sales x 365
What does ROCE show
Tells us what the profits the business has made on the resources avaliable
What is capital employed
A measure of the total resources that a business has available to it. Can also refer to the value of all the assets used by a company to generate earnings
How can a business improve its ROCE
- increase operating profit without increasing capital employed
- maintain operating profit but reduce the value of capital employed
What does gross profit show
Shows how much profit after costs are deducted a business makes for every pound earned. (A GP of 43% means that for every pound made they keep 43p of it.
What does operating profit show
Profit that is left after all costs of a business have been taken from its sales revenue.
What does current ratio show
Main liquidity ratio helps assess whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they are due
What does a current ratio of between 1.0-3.0 show
This is good as it suffuse the business has enough cash to be able to pay its debts but not too much finance tied up in current assets which could be reinvested or distributed to shareholders
What does a current ratio of less than 1.0 show
May suggest the business is not able to pay its debts. Thus the business may be required to raise extra finance or extend the time it takes to pay payables.
What does a gearing ratio of over 50% show
Highly geared
Puts the company at greater financial risks because of lower profits and higher interest rates the company would be more susceptible to loan default and bankruptcy.
What does a gearing ratio of lower than 25%
low gearing
typically meaning a company is financially stable.
What does a gearing ratio of between 25%-50% mean
This is usually the optimal gearing percentage
How can a business increase its gearing ratio
- invest in revenue growth rather than profit growth
- convert short term debt into long term loans
- pay increase dividend out of retained earnings
How can a company reduce its gearing
Focus on profit improvement (cost minimisation)
- repay long term loans
- retain profits rather than pay dividends
What are the limitations of assets turnover
- takes no consideration of profits
- less relevant for labour intensive companies
- can fluctuate from year to year
How can a business improve stock turnover
- sell of or dispose of slow moving stock
- introduce lean production techniques
- rationalise the product range made or sold to reduce stock holding requirements
How do you calculate payables
Trade payables / cost of sales x 365
what are payables
shows the number of days that it takes to pay back any payables (debts) owed by the business
what are receivables
money the business will receive from customers for sales made on credit
