Ratios

Question 1

Return on share funds

Answer 1

Profit before preference dividend/(share capital + reserves) x100

Performance of company from shareholders perspective
PROFIT AGTER TAX AND INTEREST CHARGE

Question 2

Return on capital employed (ROCE)

Answer 2

Op profit( before tax and interest) / (TAssets - CLiabilities) x100

• Performance of company as a whole
• Relates all the sources of long term finance

Question 3

Operating profit margin

Answer 3

Operating profit( before interest and tax) / sales revenue x 100

• Shows regress of competitiveness in market economic situation
• Shows ability to distinguish products and control expenses

Question 4

Gross profit margin

Answer 4

Gross profit / sales revenue x 100

• concentrates on costs of. Making goods and services ready for sale
• small changes in this ratio can be highly significant
• tends to be a ‘normal’ value for each industry

Question 5

Inventory holding period

Answer 5

Average inventories held/CoS x 100

-how quickly goods move through business
LOWER IS BETTER

Question 6

Inventory turnover

Answer 6

CoS/ inv held

Question 7

Average settlement period for trade receivables

Trade receivables turnover

Answer 7

Avg trade receivables/ sales revenue x365

(Sales revenue/TR)

-speed of collecting from creditors
HIGHER IS BETTER

Question 8

Average settlement period of trade payables

Trade payables turnover

Answer 8

Avg TP/purchases x 365 OR avg TR/ purchases x 365

(Purchases/avg TP)

-Speed of settling with debtors

TOO HIGH: cash shortage
TOO LOW: risk of losing supplier

Question 9

Asset turnover ratio

Answer 9

Sales / (TAssets - CLiabilities)

Aka sales revenue to capital employed
- how effectively assets are generating sales rev

HIGH IS BETTER

Question 10

Sales revenue per employee

Answer 10

Sales revenue/ number of employees

HIGH IS BETTER

Question 11

Current ratio

Answer 11

Current assets / current liabilities

-industry specific ratios

Question 12

Acid test ratio

Answer 12

(Current assets - inventory) / current liabilities

-emphasises most liquid assets
-expect around 1
LOWER THAN CURRENT RATIO : inv deducted

Question 13

Cash ratio

Answer 13

Operating cash flows/ current liabilities

-tightest measure of liquidity

Question 14

Gearing ratio aka debt capital ratio

Answer 14

Non current liabilities / ( share capital + reserves + non current liabilities)

Question 15

Interest cover ratio

Answer 15

Operating profit/ interest payable

-amount of profit available to cover interest due
HIGHER IS BETTER

Question 16

Dividend payout ratio

Dividend cover ratio

Answer 16

Dividend announced for the year/ profit before preference dividend x 100

(Profit before preference diffidence/ dividend announced for the year)

• shows proportion of profits paid out a dividends to shareholders

Question 17

Dividend yield

Answer 17

Dividend per share / market value per share x 100

• cash return to share relative to its current market value
• compare it to other investments

Question 18

Earnings per share

Answer 18

Profit before preference dividend / number of ordinary shares in issue x 100

HIGH IS BETTER

• increase available earnings to shareholders
• most POPULAR measure of company performance and progress

Question 19

P/E (price to earnings) ratio

Answer 19

Market value per/ share earnings per share

• measure of market confidence in future of business
• Compare average P/E for previous date
• common basis for investment decisions

Question 20

Limitations of ratios

Answer 20

Quality of financial statements
Inflation 
Restricted vision of ratios 
Basis for comparison 
Balance sheet ratios

Question 21

Operating leverage

Answer 21

CM/ operating profit

Break even analysis