Ratios

Question 1

Return on capital employed (ROCE)

Answer 1

Profit before interest and tax / capital employed

Question 2

Capital employed

Answer 2

Shareholders funds (equity) + NCL

Question 3

ROCE

Answer 3

Profit before interest and tax / net assets

Net assets = total assets - total liabilities

Question 4

Roce

Answer 4

Net profit margin x asset turnover

Question 5

Return on equity

Answer 5

Profit after interest and tax / equity

Focuses on return to ordinary shareholders

Equity = ordinary share capital and reserves

Question 6

Equity

Answer 6

Ordinary share capital and reserves

Question 7

Asset turnover

Answer 7

Sales / net assets

In terms of times

Question 8

Receivables collection period

Answer 8

Av trade receivables x 365 / credit sales

In terms of days

Question 9

Payables period

Answer 9

Ah trade payables x 365 / credit purchases

Question 10

Inventory turnover

Answer 10

Av inventory / credit purchases x 365
Days
Or:
Cost of sales / inventory

Times

Question 11

Current ratio

Answer 11

Current assets/current liabilities

Question 12

Liquid ratio/acid test/quick ratio

Answer 12

Current assets - stock / current liabilities

Question 13

Gearing ratio

Answer 13

Fixed cost capital/ total capital x100

Fixed cost capital = ncl, pref shares, debentures

Total capital = issued ordinary share capita + reserves + fixed cost capital

Shows the % of total capacity giving in a fixed return

50+ highly geared

Question 14

Fixed cost capital

Answer 14

NCL, pref shares, debentures

Question 15

Total capital

Answer 15

Issue ordinary share capital + reserves + fixed cost capital

Fixed cost capital = NCL, pref shares, debentures

Question 16

Gearing:

Analysis

Answer 16

Higher gearing higher risk (investors point)

High gearing means high proportion of profit is paid in interest

Lenders may question high gearing - why investors won’t invest more of their own mown in business - do they lack confidence

Question 17

Debt/Equity Ratio

Answer 17

Fixed cost capital / ordinary share capital and reserves x100

>100 = highly geared
<100 = low gearing

Question 18

Interest cover

Answer 18

Profit before tax and interest (PBIT) / interest payable = x times

Question 19

Interest cover

Answer 19

The no. Of times the PBIT covers interest payments

Higher cover gives greater assurance to lenders and shareholders

Link between low interest cover and high gearing

Question 20

Dividend cover

Answer 20

Profit after tax and pref dividends/ordinary dividend paid and proposed = x times

Question 21

Dividend cover - Analysis

Answer 21

This indicates how likely it is that the company will be able to pay its current rate of dividend into the future

Higher dividend = higher retention of profits

The directors may have a conservative diffident policy and be reinvesting funds in the business

Question 22

Dividend Yield

Answer 22

Dividend per ordinary share / market price per ordinary share x 100

Question 23

Dividend yield analysis

Answer 23

This shows the dividend as a % of the market price therefore showing the investors’ % return

Question 24

Earning per share

Answer 24

Profit after tax and pref dividends / no. Of issues ordinary shares = pence per share

Question 25

Earning per share analysis

Answer 25

Profit after interest, tax and pref dividends = profit left for the ordinary shareholders

The higher the better for the shareholder

Question 26

Price earnings ratio

Answer 26

Market price per share/earning per share

Question 27

Price earnings ratio

Analysis

Answer 27

It will show the no. Of years earnings that investors will pay to purchase the shares

The higher the p/e the greater the confidence investors have in the future of the company

Question 28

Dividends policy

Answer 28

The directors recommend a dividend - it is then voted on by ordinary shareholders