Ratios Flashcards
What is the formula for:
gross profit margin?
Gross profit margin:
gross profit / sales revenue × 100
What is the formula for:
operating profit margin
Operating profit margin= operating profit / sales revenue × 100
What is the formula for:
Return on capital employed
Return on capital employed=
Operating profit / captial employed (equity+ non-current loans) × 100
What is the formula for:
Return on investment
Return on investment=
Profit after tax / shareholder funds × 100
What is the formula for:
Current ratio
Current ratio =
current assets / current liabilities
What is the formula for:
Quick ratio
Quick ratio=
(Current assets - Inventory) / Current liabilities
What is the formula for:
Inventory turnover period
Inventory turnover period=
Inventory / Cost of sales × 365
What is the formula for:
Inventory turnover
Cost of sales / Inventory
What is the formula for:
Trade receivables period
Trade receivables period=
Trade receivables / sales revenue × 365
What is the formula for:
Trade payable period
Trade payable period=
Trade payables / cost of sales × 365
What is the formula for:
Net asset turnover
Net asset turnover=
Sales revenue / net assets
What is the formula for:
Interest cover
Interest cover=
Profit before interest and tax (PBIT) / Interest payable
What is the formula for:
Gearing ratio
Gearing ratio=
Debt / (debt + equity) × 100
What ratios don’t need to be multiplied by anything? (5)
●Current ratio
●Quick ratio
●Inventory turnover
●Net asset turnover
●Interest Cover
What are 3 limitations to ratio analysis?
●Past performance doesn’t always reflect future performance
●Ratios can be misinterpreted
●Financial statements have limited information
What is going concern?
And what does concern refer to/mean?
●Going concern - assumes that a business will continue to operate into the foreseeable future
●Concern - means business/organisation
What are the units for:
1. Profitability ratios (×100%) ?
2. Interest Cover/Asset Turnover?
3. Liquidity ratios?
4. Period ratios?
- As a percentage %
- Times
- As a ratio (ans : 1)
- Days
What is the interpretation for gross profit + operating profit?
For every £1 of sales, the answer% is the gross profit (in pennies). The remaining % is the cost of sales.
Then, the percentage for operating profit is the operating profit. The remaining percentage is cost of sales and other costs
What is the interpretation for return on captial employed?
For every £1 in the business, the percentage (decimal: 20% = £0.20)
is returned as profit
What is the interpretation for return on investment?
For every £1 invested, percentage as £decimal is returned as profit (after tax)
What are the interpretations for current and quick ratios?
For every £1 of current liabilities, the company has (e.g £1.16) of current assets (excluding inventory for quick ratio)
What is the ideal ratio for a (1.) Current ratio and (2.) Quick ratio
1.) 2:1 for Current Ratio
2.) 1:1 for Quick ratio
Interpretation for inventory turnover?
We are now turning over our stock X times a year on average
What does inventory days measure?
Amount of days it takes to sell our stock (on average)
What do 1.) Trade receivables period and 2.) Trade payables period measure?
1.) Average number of days for customer to pay their bill
2.) Average number of days for business to pay their obligations
Net asset turnover interpretation?
Every £1 of net asset generates (e.g) £1.84 in sales revenue
What does interest cover measure?
How many times we can pay off our debt
Gearing ratio interpretation
For £100 available to company, 20% is debt meaning the rest is equity
