Ratios Flashcards
Gross profit percentage ratio
Gross profit / sales revenue x 100
Shows gross profitcompared to sales. Higher is better
Gross profit
Net sales - cost of goods sold
Net profit
Gross profit - expenses
Net profit percentage ratio
Net profit / sales revenue x loo
Shows net profit (after expenses including tax) compared to sales. Higher is better
Return on capital employed (ROCE)
Profit (before interest charges & tax) / share capital + reserves (inc retained earnings) + borrowings x 100
Enables an investor to see if the insurer is making money for them
Trade receivables (debtor collection period)
Trade receivables (debtors) / sales x 365 days
Shows efficient in collecting outstanding payments. Lower is better
Payables (creditor) payment period
Payables (creditors) / purchases x 365 days
Shows efficiency in paying outstanding debts. Higher may be better as it offers interest free credit
Inventory (stock) turnover period
Inventory or stock / cost of sales x 365 days
Shows the average number of days that stock is held before its sold. Lower is better as stock is being turned over to meet demand
Current ratio
Current assets/current liabilities
This is a liquidity ratio showing how much cash or assets that can be sold fairly quickly to meet liabilities. Approximately 2 (or sometimes 1.5) is prudent
Quick ratio
(Current assets - inventory) / current liabilities
Shows how much cash or cash equivalents a business has. Can be below 1 but this may indicate issues
Stock turnover ratio
Cost of sales / average stock
Shows the number of times or how often stock turns over in a year. A higher number is better
Debtors turnover ratio
Sales / debtors
Shows how often the amount of debtors are turned over each year. A higher number shows debts are being turned into cash more quickly
A debtor is someone who has not yet paid
Creditors turnover ratio
Purchase / creditors
Shows how often the amount of creditors are turned over each year. A value of 12 would mean that the company pays its supplier every month (a credit period of a month)
Gearing ratio
Long term borrowing / shareholder equity x 100
Shows borrowing as a percentage of shareholder equity. A lower number is better & shows the business is not relying too much on debt finance. Typically between 80% & 100%
Return on equity (ROE)
Profit after tax / shareholder equity (capital) x 100
Shows an investor whether or not a company is making money for them & at what rate. The higher the number the better
Solvency ratio
Net assets (total assets - total liabilities) / earned premium net of reinsurance
Shows net assets compared to premium. Generally higher is better but if rates increase (hard market) which is good the ratio will drop
Solvency coverage ratio
Surplus regulatory capital / regulatory capital available
Shows capital avitiable relative to what required by regulators
Liquidity ratio
Total liabilities / cash + investments
Shows liquidity of insurer. The lower the result the greater the liquidity but it shouldn’t be too low as this shows too many assets are tied up & not making money. Many investments are freely marketable and can quickly be liquidated to fund claims.
Claims ratio
Claims incurred net of reinsurance / earned premiums net of reinsurance x 100
Show the claims incurred compared to premiums earned.
Expense ratio
Admin expense / earned premiums net of reinsurance x 100
Compares admin cost to earned premium. Includes the cost of reinsurance, claims handling, underwriting, administration etc)
Commission ratio
Acquisition costs / earned premium net of reinsurance x 100
Shows the acquisition/commission costs relative to earned premium
Combined ratio
(Claims + expenses + commission) / earned premium net of reinsurance x 100
Shows overall underwriting performance. Does not show overall profitability as investment is not included. Below 100% shows good underwriting but above 110% is poor
Outstanding claims ratio
Outstanding claims (net of reinsurance) / net assets (total assets - total liabilities)
Shows outstanding claims relative to assets. A lower ratio usually means more security (as long as there is no under reserving)
