Ratios (3.17) Flashcards
What areas of performance could ratios could focus on?
Profitability
Liquidity
Efficiency
Capital structure
What ratios do we need to know for accounting?
Capital gearing
Current ratio
Dividend cover
Dividend yield
Earning per share
Expenses in relation to revenue
Gross profit margin
Interest cover
Liquid capital ratio (acid test)
Mark-up
Price earnings
Profit in relation to revenue
Rate of inventory turnover (times and days)
Return on capital employed for sola trader and limited company
Receivable and payable days
What are the profitability ratios?
Gross profit margin
Mark-up
Expense in relation to revenue
Profit in relation to revenue (Net profit margin)
ROCE
What are the liquidity ratios?
Current ratio
Liquid capital ratio (acid test)
What are the efficiency ratios?
Inventory turnover (times and days)
Trade receivable days
Trade payable days
What is the capital structure ratio?
Gearing
What are the investor ratios?
Dividend yield
Earnings per share
Dividends cover
Price earnings
Interest cover
What is the formula for capital gearing?
(NCL/Capital employed)x100
%
What is the formula for the current ratio?
Current assets/ current liabilities
x:1
What is the formula for dividend cover?
Profit after interest and tax/ ordinary share dividends paid
What is the formula for dividends yield?
(Dividends per share/ market price per share)x100
What is the formula for earnings per share?
Earnings in pence(profit after tax in pence)/ Number of issued ordinary share
What is the formula for expenses in relation to revenue?
(Expenses/ revenue)x100
What is the formulas for gross profit margin?
(gross profit/ revenue)x100
What is the formulas for gross profit margin?
(gross profit/ revenue)x100
What is the formula for interest cover?
Profit before interest and tax (operating profit)/ interest payable
What is the formula for the liquid capital ratio?
(Current assets- inventories)/ current liabilities
x:1
What is the formula for Mark-up?
(Gross profit/cost of sales)x100
What is the formula for price earnings?
Current market price/ earnings per share
What is the formula for profit in relation to revenue?
(Profit for the year (b4 tax)/ revenue)x100
What is the formula for rate of inventory turnover in times?
Cost of sales/ average inventory ((open +close)/2))
What is the formula for rate of inventory in days?
(average inventory/cost of sales)x365
What is the formula for ROCE? (sole trader)
(Profit before interest and tax/ capital employed)x100
What is capital employed?
capital + NCL= sole trader
Equity + NCL= limited company
What is the formula for ROCE? (limited company)
(Profit from operations/ capital employed)x100
What is the formula for trade payable days?
(Trade payables/ credit purchases)x365
What is the formula for trade receivable days?
(trade receivables/ credit sales)x365
What is the significance of the gross profit margin?
Ability to mange cost of sales
Bigger is better
What is the significance of gross profit mark-up?
Higher mark-up = cheap production cost or high good value
What is the significance of expenses in relation to revenue?
Control of indirect expenses
What is the significance of profit in relation to revenue?
Ability to control all expenses
Bigger is better
What is the significance of ROCE?
How safe investment is (return received)
If lower than safe option (bank) may as well invest in safe option
What is the significance of the current ratio?
Ability to meet short term debts
Higher CA then CL wanted not too high as assets will be wasted
What is the significance of the acid test?
Assets that can immediately be turned into cash to pay short term obligations
Preferably higher then CL but cash heavy businesses (Tesco) can cope with lower
What is the significance of the inventory turnover ratios?
Want times to be higher and days to be lower as it means you are selling inventory quickly and receiving cash quicker
What is the significance of TR and TP days?
TR when money is received
TP when money has to be paid
Want TR lower than TP (otherwise have to borrow)
What is the significance of gearing?
How much of companies capital structure is borrowed
Preferably less then 50 (struggle to pay otherwise)
Not 0 as means taking no risk
What can ratios be used to help?
Establish trends
Compared with other businesses in the same industry (who face similar conditions) or an industry average
Compare with standards set by particular stakeholder that they think are acceptable
Forecast likely future performance
How will the answer for the dividend yield ratio be presented?
As a %
What does the dividend yield tell an investor?
The annual % return paid on a quoted share
What is a quoted share?
One which is available on the stock exchange or similar market
What does dividend yield ignore?
Total profits
What is the limitation of dividend yield ignore total profits?
Earnings might positively on share price creating capital growth even if profits not passed to shareholders as dividends (shareholder still benefitting from good performance and increase chance of dividend)
What units must the top and bottom of dividend yield be?
Pence
How is the answer form earnings per share presented?
As an amount of money (usually pence)
What does the earning per share ratio show?
Amount of profit that is generated by each share which allows for comparisons between years and performance to be judged
What is the earning per share ratio a good indicator of?
Performance as it indicates how much of the firms profit can be attributed to each ordinary share
What is the limitation of the earnings per share ratio?
Does not consider relative value of a share meaning comparisons between businesses is difficult
Why does the earning per share ratio not allow an investor to judge their personal return?
As it considers profit not dividend
How is dividend cover expressed?
Number of times not an amount
What does dividend cover show the relationship between?
Total profit and amount of dividend paid
What does a figure of 5 indicate on the dividend cover ratio?
Profits are 5 times higher than dividend paid
What would the business have to do if the dividend cover was below 1?
Must use past retained earnings to pay current dividend as this years profit was smaller than dividend being paid
What is it important to remember with dividend cover?
Figure should be sufficiently low to reward shareholders adequately but not so low that it causes problems for the business
How is the price earnings ratio expressed?
Number of times not an amount of money
What is compared when using the price sharing ratio?
Current market price is compared to earnings per share
What does the price earning ratio show?
Show how many times the price of share is above the latest earnings
Why will investors use the price earnings ratio?
Helps investors judge value or expensiveness of the share
What can the price earnings ratio be an indicator of?
Expectations of the market
What does a high price earnings number mean?
Suggests business actions are likely to result in improved performance in the future
What does a low price earnings number mean?
Low profits after tax and interest
How is interest cover ratio expressed?
Number not an amount of money
What ratio is interest cover closely related with?
Gearing
What does interest cover indicate?
Safety margin or profit over the interest costs of the business
What does a higher interest cover number mean?
Generally desirable as suggests business will have few problems covering their interest payments (finance costs)
