Ratios Flashcards
What is Prospective P/E
Otherwise known as a forward P/E
P/E using the forecast for the next years earnings
What is the price earnings ratio
Price of share/earnings per share
The more you pay for the shares the lower your expected return
Eg Wingate value or current price of share is 500 earnings per share 42.2 = 500/42.2 = 11.8
So after 11.8 years earning 42.2p per share I will get 500p per share
What is the historic p/e
Based on historic earnings per share
What is asset turnover ratio
Sales or Revenues / average Total assets
The higher the ratio the better it is
Indicator of efficiency with which company is deploying its assets
For example company X may have an asset base of £4 million at the beginning of a given year and 500 million at year end with revenues of 900 million generated in that year the asset turnover ratio for company X is there for 900 million ÷4 50 million
How do you calculate Debtors Ratio
DEBTORS RATIO = sales (credit)/debtors
The resulting fraction is normally expressed in a time period indicating the average length of time customers are taking to pay them as owed to the business or in other words the speed with which debts are collected from the customers
Example - closing trade debtors 36,000, total credit sales 400,000
36000/400000 * 52 = 4.68 weeks or 36 000/400000 * 365 32.85 days
What does the debtors ratio measure
Efficiency
It is in the businesses best interest to cut this period as much as possible so that it is converting its credit sales into cash more quickly although if it cuts the period too much it may discourage potential customers who may then go elsewhere. The business must find a happy medium between pulling in cash as quickly as possible and providing attractive credit terms to its customers
What is a creditors ratio
It is the speed in which the business pays its debts due to its creditors
Total Creditors excluding accruals over credit purchases for example creditors closing balance is 42000 Total credit purchases 420 000
42000/420000 * 52 = 5.2 weeks or 36.5 days if multiplied by 365
What is a gearing ratio
The gearing ratio can be found by dividing the prior capital i.e. Preference capital, debentures and long-term loans regarded as prior because they become before the ordinary capital by the total capital to show the relationship between the main owners of the business net assets ratio is expressed as a percentage
What is another name for a gearing ratio
Debt to equity ratio
So see you at a glance how much the business is funded by debt and how much equity
Shows how large the debt is relative to equity
Wingate foods plc Funding structure Net debt (15) cash overdraft 893 loans 3000 net debt 3878
shareholders equity dividends payable 154 Share capital 50 share premium 275 retained profit 2446
total shareholders equity 2925
Net funding 7005
What is the percentage gearing
Debt/equity
3878/2925
133%
Wingates debt is 1.33 times bigger than its equity
What is the return on capital employed
Measures the net profit as a percentage of the funds invested in the business
Profit is normally taken as before taxation and in the case of the limited liability company before debenture interest and dividends
What is the capital employed
Net operating assets or Total Assets less current liabilities
fixed assets plus working capital
What is the ROCE
Balance sheet as at "Instant Foods Ltd 31/12/xxx8" 31/12/xxx9 Fixed assets (after depreciation) Buildings and premises £180,000 £180,000 Plant and machinery 30,000 30,000 Furniture and fittings 35,000 35,000 Motor van 20,000 20,000 Total Fixed Assets 265,000 265,000
Current assets
Stocks”
£15,000 40,000
Debtors
20,000 14,000
Cash
45,000 80,000
Total Current Assets
£80,000 £134,000
Current liabilities
Creditors £40,000 £ 80,000
Accruals 20,000 25,000
Corporation tax 10,000 14,000
Total Current Liabilities
£70,000 £119,000
Working capital 10,000 15,000
Fixed Assets less Current Liabilities £275,000 £280,000 Share capital "Preference shares (authorised and issued) 120 000 120 000 Ordinary shares (authorised and issued)" 100,000" 100,000" Total 220,000 220,000
Reserves 10 000 10,000 Profit and loss account 30,000 35,000 Debentures 15,000 15,000 Total £275,000 £280,000
Profit and loss account for the year ended
31/12/xxxS 31/12/xxx9
Sales - credit £320,000 £250,000
cash 180,000 350,000
Total Sales
500,000 600,000
Opening stock 10,000 £ 15,000
Purchases - credit 220,000 330,000
cash 70,000 100,000T
Total Purchases
300,000 445,000
Closing stock (15,000) (40,000)
Cost of sales (285,000) (405,000) Gross Profit 215,000 195,000
Wages and salaries 70,000 76,000
Rent and rates
20,000 24,000
Postage and telephone
15,000 19,000
Heat and light
28,000 20,000
Repairs and renewals
20,000 10,000
Depreciation
25,000 25,000
Debenture interest
2,000 2,000
Total Expenses
180000 176,000
Net profit before tax
35,000 19,000
Corporation tax
(10,000) (14,000)
Net profit after tax 25,000 £ 5,000
Net profit before tax plus debenture interest/capital employed
35000 + 2000 = 37000/275000 = 13.45%
What is liquid ratio
Means cash and other assets capable of being converted into cash with a view to pay off its current liabilities quickly. Stock is not included in current assets as it may be sometime before it can be expected to be converted into cash.
The ratio is therefore current assets distance divided by current liabilities
What is another name for liquid ratio
Quick Ratio or acid test ratio
