Ratios and Interpretation

Question 1

Gross Profit Margin =

Answer 1

Gross profit / Sales Revenue x 100

Question 2

Operating Profit Margin

Answer 2

Operating Profit / Sales Revenue x100

Question 3

Return on Capital Employed

Answer 3

Operating Profit / Equity + NCL

Question 4

Return on Investment

Answer 4

Profit After Tax / Shareholder funds x100

Question 5

Current Ratio

Answer 5

Current Assets / Current Liabilities

Question 6

Quick Ratio

Answer 6

Current Assets - Inventory / Current Liabilities

Question 7

Inventory Turnover Period

Answer 7

Inventory / Cost of sales x365

Question 8

Inventory Turnover

Answer 8

Cost of sales / Inventory

Question 9

Trade Receivables Period

Answer 9

Trade Receivables / Sales Revenue x365

Question 10

Trade Payables Period

Answer 10

Trade Payables / Cost of Sales x365

Question 11

Net Asset Turnover

Answer 11

Sales Revenue / Net assets (Total Assets - Current Liabilities)

Question 12

Interest Cover

Answer 12

Profit before interest and tax / Interest Payable

Question 13

Gearing Ratio

Answer 13

Debt / Debt + Equity

Question 14

What is the industry standard for current ratio?

Answer 14

2:1

Question 15

What is a risky gearing ratio?

Answer 15

> 50%

Question 16

Name some limitations of ratio analysis

Answer 16

• Past performance is not always a good indicator of future
  performance
  o rate of change in business environment.
  o external influence
• Ratios quantify what has happened, not why
• Lack of standard definitions
• Figures taken from the statement of financial position may be
  unrepresentative
• Accounting policies may differ
• Misinterpretation is possible