Ratios Flashcards
Profitability- Return on Equity (ROE) - Insurance Industry
Profit after tax/ shareholders equity (capital) x 100
Higher the figure emerging the better the return. Rough guide the investor should be making 2.5 times the amount they would earn in a bank deposit account over a 5 year period.
Gearing Ratio - Insurance Industry
Long-term borrowings/ shareholders equity x 100
Below 10% regarded as having low lever of gearing, above 10% is highly geared. Highly geared ratio suggests company can’t finance own activities. However this may be preferred to issuing too many shares and losing control or splitting profits between too many
The Three Combined Ratios - Insurance
Claims ratio - claim incurred net of reinsurance/ earned premium net of reinsurance x 100
Expense ratio - administrative expenses / earned premium net of reinsurance x 100
Commission ratio - acquisition costs / earned premium net of reinsurance x 100
Combined Ratio - Insurance Industry
Claims + expenses + acquisition costs / earned premium net of reinsurance x 100
Also known as operating ratio.
Measures underwriting performance, used by underwriters, accountants, analysts, competitors and senior executives. Below 100% generally indicates good underwriting performance and above 110% indicates poor underwriting performance/ catastrophe losses.
Liquidity Ratio - Insurance Industry
Total Liabilities/ cash + investments
The lower the result, the greater the liquidity. Insurers liquidity can easily come from freely marketable investments as these are held to fund claims. Need to hold substantial investments to be able to finance long term liabilities.
Solvency Ratio - Insurance Industry
Total eligible capital / solvency capital requirement
Or
Net assets / earned premium net of reinsurance
The higher the figure the stronger the company. Although hard markets show deterioration but economic position improves. Company with high level of capital to support premiums seen as ‘overcapitalised’
Frequently used ratios
Profitability
Productivity
Liquidity
Activity (or turnover)
Gearing
Gross Profit Percentage Ratio - Profitability Ratio
Gross profit / sales (revenue) x 100
Decrease may indicate greater competition in the market
Increase may indicate the company is in a position to exploit the market
A change can be due to a change in the mix of products sold
Net profit percentage ratio - profitability ratio
Net profit / sales (revenue/ turnover) x 100
Relationship between the gross profit and net profit percentage gives indication of how well a company is managing business expenses. If net profit has decreased over time but gross profit remained the same this might indicate lack of internal control over expenses
Profitability Ratio - Return on capital employed (ROCE)
Profit before interest charges and tax / share capital + reserves + borrowings x100
Enables an investor to see if the insurer is making money for them and make comparisons between companies. Ratio is concerned with with the relationship of profit to the total capital employed and is seen as giving an indication of how efficiently and effectively management have deployed the resources available
Profitability ratios
Compares the money value of the outputs with the money value (the cost) of the inputs; the difference between the two is profit, which can be expressed either as an amount of money or as a ratio
Productivity Ratio
Compares the inputs and outputs directly, so does not use money as a measuring rod
Efficiency Ratios
Trade receivables/debtors / sales x 365 days
Collection period provides an indication of how successful debt collection has been
Payables/creditors / purchases x 365 days
Links the value of payables/ creditors with the amount of goods and services that a company is purchasing on credit
Inventory/stock / cost of sales x 365 days
Inventory/stock turnover period indicates the average number of days that inventory/stock is held for
Liquidity ratios
Measures the company’s liquid assets - liquid assets are all those assets that either are money or can be turned into money at short notice
Liquidity ratios - current and quick
Current ratio - current assets / current liabilities
Quick ratio - current assets excluding stock / current liabilities
Current ratio of more than 2 is prudent to maintain creditworthiness but recently 1.5 has become normal.
Quick ratio will often be 1
