Ratios Flashcards
What are the standard 5 ratio categories?
- profitability ratios;
- productivity ratios;
- liquidity ratios;
- activity (or turnover) ratios; and
- gearing ratios.
What are the profitability ratios?
- gross profit percentage;
- net profit percentage;
- return on capital employed.
What is the gross profit ratio?
Gross profit / Sales (revenue) × 100
What is the net profit ratio?
Net profit / Sales (revenue/turnover) × 100
What is the return on capital employed (ROCE) ratio
profit before interest charges and tax / share capital+reserves + borrowings × 100
Why the ROCE ratio is an important measure?
- A low return could easily be wiped out in a recession.
- When acquiring other businesses or moving into new markets, there should be a high ROCE to make it worthwhile for the capital providers.
- A persistently low ROCE in a business division may signal that it is time to dispose of it.
what does a productivity ratio measure?
A productivity ratio is a measure of production efficiency.
It is calculated by dividing business outputs by the inputs used in production.
What is the current ratio?
current assets / current liabilities
What is the quick ratio?
current assets excluding stock / current liabilities
What is the gearing ratio?
long-term borrowings / shareholders’ equity × 100
What ratios are used in the insurance industry?
- solvency;
- liquidity;
- capital adequacy;
- profitability; and
- outstanding claims.
What is the solvency ratio?
total eligible capital / solvency capital requirement
What is the liquidity ratio?
total liabilities / cash+investments
What is the return on equity ratio?
profit after tax / shareholders’ equity (capital) × 100
What is the combined ratio?
claims+expenses + acquisition costs / earned premium net of reinsurance × 100
