Ratios Flashcards
What is gross profit percentage?
Shows the level of gross profit which a business has made on its sales revenues, it’s a measure of the firms trading, profitability and efficiency.
Higher the percentage the better the performance.
How to calculate gross profit percentage?
Gross profit divided by sales revenue X 100
E.g. if a businesses percentage is 42.9% then for every £1 of sales the firm makes 43p gross profit.
What is net profit percentage?
Shows amount of net profit which is made on sales revenue, higher the percentage the better performance.
How to calculate net profit percentage?
Net profit divided by sales revenue X @00.
E.g. If net profit percentage is 19.6% then for every £1 of sales makes 19.6p profit
What is inventory turnover rate?
Shows the number of times in a year that the business is able to sell the value of its average inventory.
How to calculate inventory turnover rate?
Cost of sales divided by average inventory.
Average inventory is opening inventory plus closing inventory divided by 2.
If a businesses turnover rate is 6.9 this means that the business sells its inventory almost 7 times a year.
What is the return on capital employed?
Shows the profitability of the business by comparing the net profit with the capital invested by the owner. It shows the net profit which the owner has received on the capital invested, higher return means better performance.
How to calculate return on capital employed?
Net profit divided by capital employed X 100.
If a businesses return on capital employed is 16.9% this means that the owner is making almost 17% profit on their investment.
What is working capital ratio?
Shows the relationship between a firm’s current assets and current liabilities. It measures the firm’s ability to pay its current debts.
How to calculate working capital ratio?
Current assets divided by current liabilities.
If a businesses ratio is 2:1 this means that for every £1 which the business owes, it has £2 of assets therefore is able to pay the debt, ideal ratio is between 1.5:1 and 2:1.
