Ratios Flashcards
What are the 6 ratios?
Gross Profit Margin Operating Profit Margin Gearing Ratio Current Ratio Payable Payment Days Receivables Collection Days
What is the formula for Gross Profit Margin?
Gross profit/turnoverx100
What is the formula for Operating Profit Margin?
Operating profit/turnoverx100
What is the formula for Current Ratio?
Current Assets/Current Liabilities
What is the formula for Gearing Ratio?
Long Term Debt/Total Capital Employedx100
What is the formula for Payables Payment Days?
Payables/cost of salesx365days
What is the formula for Receivables Collection Days?
Trade Receivables/turnoverx365days
What does Gross Profit Margin calculate?
Gross profit earned from £1 of sales
What does Operating Profit calculate?
Net profit earned from £1 of sales
What does Current Ratio calculate?
Coverage of short term liabilities by short term assets, usually the answer should be more than 2
the higher the ratio the more stable the company is. the lower the ratio the greater risk of liquidity associated with the company
What does Gearing Ratio calculate?
% of borrowed finance to equity funding
a high gearing ratio represents a high proportion of debt equity, and a low gearing ratio represents a low proportion of debt to equity
What does Paybles Payment Days calculate?
Time taken to pay creditors to pay their bills
What does Receivables Collection Days calculate?
Time taken by debtors to pay their invoices
What does efficiency ratios do?
calculate efficiency of asset utilization
What does profitability ratios do?
calculates ability to generate profit (long term survival)
What does solvency ratios do?
calculates ability to meet debt obligations with cash as they fall due to payment
What ratios is solvency ratios?
current ratio
What ratios are efficiency ratios?
Payables payment days and Receivables collection days
What ratios are profitability ratios?
Gross profit margin and Operating profit margin
What is the importance of ratios?
we use ratios to check how profitable a business it.
ratio analysis can help us check if a business is doing better/worse that previous years.
What is ratio analysis?
involves comparing one figure against another to produce a ratio, and assessing whether the ratio indicates a strength or a weakness in a company affairs.
What do ratios identify?
trends, comparisons of ratios with similar companies, company performance relative to its competitors
What ratio is is gearing ratio?
Basic gearing
What does gearing ratios calculate?
calculates how organisations are funded in terms of the proportion of debt to equity.
What are positives of current ratio?
one of the most useful ratios because it helps determine the liquidity position of the business, as well as helps understand how cash rich a company is, determine short term financial strength, gives an idea of operating cycle, shows managements efficiency in meeting the creditors demands.
What are the main advantages to any ratios?
comparisons, industry analysis, stock valuation, planning & performance
What is liquidity?
the availability of liquid assets to a market or company/liquid assets=cash
What are the disadvantages to current ratio?
may lead to overestimation of the liquidity position because it includes inventory in the calculation, in companies where sells are seasonal current ratio may show lower numbers in some months and higher current ratio in the other, an equal increase of decrease in the current assets and current liabilities can change the ratio.
