Ratios Flashcards
Profitability ratios
Margins and return on equity
Gross margin percentage EBITDA Margin percentage Net Profit Margin percentage RoE percentage RoCE percentage
Gross margin %
Gross profit / sales
profit made on a product or service
EBITDA margin %
EBITDA / sales
profit made from the operation of the business
Net profit margin %
Net profit / sales
shows final or bottom line profit
RoE %
Net profit / shareholders’ equity
how much profit comes back for each £1 tied up in equity
RoCE %
Operating profit (EBIT) / capital employed
capital employed = shareholders funds + bank debt
Find bank debt on the balance sheet - includes both long term and current bank loans and HP finance.
how much profit comes back from each £1 tied up in the total capital used by the business.
Gearing ratios
Debt burden relative to size
Debt to equity
Interest cover
Liquidity ratios
Ability to pay debts easily
Current ratio
Acid test
Acid test / quick ratio
current assets - stock / current liabilities
same as current ratio but takes out the value of stock because stock may be over-valued or have no value if the business folds.
greater than 1 = good
Current ratio
current assets / current liabilities
short-term financial strength of a company (not a percentage).
less than 1 = company could not pay all debts in a year, may have cashflow problems
greater than 1 = it could
Efficiency ratios
Fitness of operations
No. stock days & stock turn
Debtor days
Asset turn
No. stock days and stock turn
No. stock days = stock/ COGS per day
stock from BS
COGS from P&L
stock turn per annum = 365 / no. stock days
Too much stock means cash tied up unnecessarily, and also it may be risky to hold it too long (as it becomes unsaleable).
Debtor days
debtors / sales per day
shows how quickly a business collects its money from customers. 30 days is normal - any more and its a warning sign.
debtors - from BS
sales per day - from P&L
Cash conversion cycle
stock days + debtor days - creditor days
measures efficiency of converting the product/service into cash
Asset turn
annual sales / capital employed
capital employed = shareholders equity + bank debt
efficiency of use of total assets relative to sales
The asset turnover ratio tends to be higher for companies in a sector like consumer staples, which has a relatively small asset base but high sales volume. Conversely, firms in sectors like utilities and telecommunications, which have large asset bases, will have lower asset turnover.
