Ratios Flashcards
Return on capital employed (ROCE)
Profit before interest and tax / capital employed
Capital employed
Shareholders funds (equity) + NCL
ROCE
Profit before interest and tax / net assets
Net assets = total assets - total liabilities
Roce
Net profit margin x asset turnover
Return on equity
Profit after interest and tax / equity
Focuses on return to ordinary shareholders
Equity = ordinary share capital and reserves
Equity
Ordinary share capital and reserves
Asset turnover
Sales / net assets
In terms of times
Receivables collection period
Av trade receivables x 365 / credit sales
In terms of days
Payables period
Ah trade payables x 365 / credit purchases
Inventory turnover
Av inventory / credit purchases x 365
Days
Or:
Cost of sales / inventory
Times
Current ratio
Current assets/current liabilities
Liquid ratio/acid test/quick ratio
Current assets - stock / current liabilities
Gearing ratio
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
Fixed cost capital
NCL, pref shares, debentures
Total capital
Issue ordinary share capital + reserves + fixed cost capital
Fixed cost capital = NCL, pref shares, debentures
Gearing:
Analysis
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
Debt/Equity Ratio
Fixed cost capital / ordinary share capital and reserves x100
>100 = highly geared <100 = low gearing
Interest cover
Profit before tax and interest (PBIT) / interest payable = x times
Interest cover
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
Dividend cover
Profit after tax and pref dividends/ordinary dividend paid and proposed = x times
Dividend cover - Analysis
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
Dividend Yield
Dividend per ordinary share / market price per ordinary share x 100
Dividend yield analysis
This shows the dividend as a % of the market price therefore showing the investors’ % return
Earning per share
Profit after tax and pref dividends / no. Of issues ordinary shares = pence per share
Earning per share analysis
Profit after interest, tax and pref dividends = profit left for the ordinary shareholders
The higher the better for the shareholder
Price earnings ratio
Market price per share/earning per share
Price earnings ratio
Analysis
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
Dividends policy
The directors recommend a dividend - it is then voted on by ordinary shareholders
