Ratios Flashcards
Operating Profit
Revenue less operating expenses, day to day expenses, cost of goods sold
Operating Profit Margin
Operating Profit / Revenue x 100
Gross Profit
Gross profit / Revenue x 100
Expenses
Expense / Revenue x 100
Capital Employed
Total equity + non-current liabilities
ROCE
Operating profit / capital employed x 100
Return on shareholders funds ratio
Profit after tax / total equity x 100
current ratio
current asset / current liabilities
quick / acid ratio
current assets (less inventory) / current liabilities
inventory turnover
cost of sales / inventories
inventory holding period (days)
inventories / cost of sales x 365
trade payables (days)
payables / cost of sales x 365
trade receivables
receivables / revenue x 365
working capital cycle
inventory holding period + receivables - payables
asset turnover (net assets)
revenue / (total assets - current liablilites)
asset turnover (non-current assets)
revenue / non-current assets
interest cover
operating profit / finance cost
gearing
total debt / total debt + equity x 100
what does ROCE mean
how well the money invested is being used to generate profit
what does shareholders funds ratio show
how well their investment in the company is performing
what does the current ratio show
the number of times current liabilities are covered by current assets
what does the quick ratio show
the liquidity of the business - the ability to pay current liabilities on time
what does inventory turnover show
the amount of times in a year the inventory is full replaced
what does asset turnover show
how well assets are generating sales - the number of times the value of assets has been generated in revenue
what does interest cover show
an indication of the impact of debt - how many times the interest can be covered by the operating profits
what does gearing show
how much of an organisation is funded by borrowing - the lower the better
Reasons for higher interest cover
- higher profits
- lower interest payments or interest rates
- may be easier or cheaper to obtain finance in future
Reasons for longer payable days
- paying suppliers later
- may hav agreed credit terms
- may have cash flow issues
- be cautious has could get bad reputation with suppliers
Reasons for better current ratio
- more solvent
- may have more current assets
- may have less current liabilities
Reasons for better ROCE
- capital employed working more efficiently to generate profits
- may have higher profits
- may have lower equity
- may have less non-current liabilities
Reasons for increased operating profit
- increased selling prices
- decreased cost of sales
- overheads / expenses may be better controlled
Reasons for worse acid / quick test
- More current liabilites in comparison to current assets
- Increased current liabilities
- possible solvency issues (could struggle paying short-term debts)
Reasons for better gearing
- more is financed by equity not debt
- less non-current liabilities
- higher equity
- company is less financially risky
Reasons for worse inventory turnover
- turning over inventories less times in the year
- may have higher levels of inventory held
- inventory takes longer to sell
- inventory could be poorly managed
Cost of sales
Opening inventory + Production - Closing Inventory
How to convert % into 1 in e.g. 2%
Convert % to decimal (0.02) then divide 1 by that
1/0.02 = 50 so will be 1 in 50
Reasons for material variances
change in amount paid (price variance)
price difference will likely affect quality
quality affects wastage
can cause change in usage variance
Reasons for labour variance
quality of materials affects speed of work
idle time - broken machine or poor communication between warehouse and production
Reasons for overhead variance
if production level drops not enough overhead is absorbed
poor budgeting
4 types of standard
ideal - assumes ideal conditions and not attainable
basic - based on historical information which can become out of date. good for long term information to identify trends
normal - expected cost under normal manufacturing conditions
target - more challenging for team as linked to target costing. target costing is where product cost must be kept below a set level to acheive the determined profit margin
