Ratios Flashcards
What’s the formula for the CURRENT RATIO and what does it measure?
Formula: Current Ratio = Current Assets / current Liabilities
It measures the company ability to generate cash from its business operations, it measures the company liquidity, meaning the amount of cash a company can obtain quickly to settle its debts.
What’s the formula for the ACID TEST RATIO and what does it measure?
FORMULA: Quick Ratio = Current assets - inventory / Current Liabilities
eliminates iliquid and subjectively valued inventory
What’s the formula for the INVENTORY HOLDING PERIOD and what does it measure?
Inventory turn over period = (inventory / cost of sales) x 365
What’s the formula for the RECEIVABLES COLLECTION PERIOD and what does it measure?
receivables Collection period = (trade receivables / credit sales) x 365
This gives a rough measure of the average length of time it takes a company to be paid what they’re owed.
consistent with quick ratio? if not, investigate.
What’s the formula for the PAYABLES PAYMENT PERIOD and what does it measure?
Payable Period = (trade accounts payables / Purchases) x 365
This gives a rough measure of the average length of time it takes for a company to pay what it owes.
Cost of sales can be used as an approximation for purchases.
An increase can be a sign of a lack of long-term finance or poor management of current assets.
What’s the formula for the GEARING and what does it measure?
Gearing = Total long-term debt / ( equity + Total Long term debt)
It measures the financial risk of a company.
What’s the formula for the INTEREST COVER and what does it measure?
Interest Cover = PBIT / Interest Payable
Company must generate enough profit to cover interest. 3+ safe? consider profit vs cash
What’s the formula for the RETURN ON TOTAL CAPITAL EMPLOYED and what does it measure?
ROCE = PBIT / Capital employed —-> capital employed is Total Assets less current liabilities
Measures overall efficiency of company in employing resources available to it.
What’s the formula for the GROSS MARGIN and what does it measure?
GROSS MARGIN = Gross Profit less cost of Sales / Sales
Measure of the efficiency with which sales (input) has been used to generate profit (value of output)
Increased by charging higher prices or reducing costs
What’s the formula for the NET PROFIT MARGIN and what does it measure?
NET MARGIN = NET Profit/ Sales
concerned with profit over which operational management can exercise day to day control.
What’s the formula for the ASSET TURNOVER and what does it measure?
Asset Turnover = Sales / Total Assets less Current Liabilities
Key measure of productivity measuring how intensively capital employed has been used to generate sales.
What are the limitations of Ratios?
1) Comparative information is not always available.
2) They sometimes use out of date information.
3) Focuses in on financial indicators and ignores non-financial indicators.
4)Interpretation requires thought and analysis. Ratios should not be considered in isolation
