Ratios Flashcards
what are the ways to calculate capital employed? (!!!!)
- Equity + long term Liabilities (Shares + Reserves + LT loans)
- Non-Current Assets + NET current asset ( Current Assets – Current Liabilities)
- Total Assets – Current Liabilities
Depends on the information provided
what are ratios?
Ratios in accounting are mathematical expressions that provide insights into the financial performance and health of a business. They involve the comparison of different financial elements from a company’s financial statements, such as the balance sheet and income statement.
what is capital employed?
Capital employed refers to the total amount of capital invested in a business for the purpose of generating profits.
what is the difference between cash basis accounting and accruals accounting?
Accrual records transactions when they occur, providing a more comprehensive view of a company’s financial health over time. It aligns with the concept of economic activity, even if no cash has changed hands. whereas cash basis records transactions only when cash is exchanged, making it simpler but potentially less accurate in reflecting a company’s true financial performance.
what should you keep in mind about ratios?
Ratio analysis only provides a historical insight and any conclusions must only be made in the light of a company’s expected performance in the future.
“Looking at ratios helps us understand how a company did in the past. But to make smart decisions, we need to think about how the company will do in the future based on these ratios.”
when are ratios most useful?
When they can show the trends in the relevant figures and give an indication of the effectiveness of the policies that are being pursued.
What is the formula for Return of Capital Employed and why is it the way it is?
(operating profit)/(capital employed) x 100
op.profit: revenue - operating expenses
capital employed:
What is the debt ratio formula and what does it represent?
Debt ration = Long-term liabilities/total capital empoyed
the debt ratio tells you what portion of a company’s assets is funded by debt. A higher debt ratio indicates a higher level of financial leverage and potential risk, as more of the company’s assets are financed by borrowing.
What is the interest cover ratio and what does it represent?
Interest ratio= net interest before tax/interest
The interest coverage ratio indicates how well a company can meet its interest payments using its operating profits. A higher ratio suggests a better ability to handle interest expenses, while a lower ratio may signal potential financial challenges.
What is the current ration and what does it represent?
CA/CL
the current ratio helps assess whether a company has enough short-term assets to cover its short-term debts. A ratio above 1 indicates the company has more assets than liabilities, suggesting good short-term financial health.
What is the liquid ratio (acid test)
LR= Liquid Assets/Current Liabilities
Liquid Assets: Assets that can be quickly converted to cash without a significant loss in value. This typically includes cash, marketable securities, and accounts receivable.
• Current Liabilities: Short-term obligations expected to be settled within one year.
In simple terms, the liquid ratio provides a more conservative measure of a company’s ability to cover short-term liabilities, excluding inventory from current assets. A ratio above 1 suggests the company can meet its short-term obligations with its most liquid assets.
How to calculate ROCE ratio and what does it mean?
ROCE = PBIT/Capital Employed
PBIT (Revenue-Op.expenses)
This ratio reflects the return a company generates on the total capital invested in its operations. A higher ROCE generally indicates more efficient use of capital. Keep in mind that ROCE is more related to profitability and efficiency rather than short-term liquidity.
When ROCE is more, then profitd are increasing at a higher pace than capital which is good for investors
(also finance costs include interest rates!)
What is the profit margin formula and what does it mean?
Profit Margin = Net Profit/Sales x 100
The net profit margin is a profitability ratio that measures the percentage of revenue that results in net profit. A higher profit margin indicates better profitability, while a lower margin suggests lower profitability relative to revenue.
10% is average
5% is low
20% is high
However, it’s important to consider industry standards and compare the net profit margin with competitors or historical data to gain a better perspective on your business’s performance.
what is the gearing ratio and what does it mean?
GR= Total Debt/Total Equity
indicates the proportion of a company’s financing that comes from debt compared to equity. A higher ratio suggests a higher level of financial leverage, which can amplify both profits and losses. It is commonly used to assess a company’s financial risk and its ability to meet its long-term obligations.
