Ratios And Percentages Flashcards
What are financial ratios meant to do?
Compare the results of the current year to the results of the previous year
What are the four types of ratios?
Profitability
Return on owner’s equity
Solvency
Liquidity
How many profitability ratios are there?
Five
What are the five profitability ratios?
Percentage gross profit on turnover Percentage gross profit on cost of Sales Percentage operations profit on sales Percentage operating expenses on sales Percentage net profit on sales
How are profitability ratios expressed?
As percentages
What figures are used for the percentage gross profit on turnover?
Gross profit over Net sales
What values are used for the percentage gross profit on cost of Sales?
Gross profit over cost of Sales
What does the percentage gross profit on cost of Sales give us?
The mark-up achieved
How can we interpret the percentage gross profit on sales?
It is good if it has gone up
How can we interpret the percentage gross profit on cost of Sales?
If it is greater than the proposed mark-up it is good
What figures will you use for the percentage operating profit on sales?
Operating profit over net sales
What figures will you use for the percentage operating expenses on sales?
Operating expense over net sales
What figures will you use to get the percentage net profit on sales?
Net profit over net sales
What does the return on owner’s equity tell the owner?
How profitable his investment in the business is
When does the owner know his business is profitable?
The return on owner’s equity will be greater than that which he can obtain through a Fixed deposit
What is the formula for the return on owner’s equity percentage?
Net profit over average owner’s equity multiplied by one hundred
How do you work out the average owner’s equity?
Owner’s equity at the beginning of the year added to the owner’s equity at the end of the year
Total divided by two
What does the solvency ratio tell us?
It reveals whether the business is able to meet its liabilities
When is a business said to be solvent?
When the value of its assets is greater than that of its liabilities
How is the solvency ratio calculated?
Total assets divided by total liabilities
How is the solvency ratio represented?
Total liabilities is put on the left and is made equal to one
The total assets is put relative to the one
How can you interpret solvency from the solvency ratio?
If the total assists value is greater than one, the business is solvent
What does liquidity deal with?
The ability of a business to meet its short-term obligations
What are the two types of liquidity ratios?
Current ratio
Acid test ratio
What is the ideal current ratio?
Current assets should be higher than current liabilities, but not too high
Why shouldn’t the current ratio be too high?
This indicates too many funds are tied up in things that do not earn a return
It could also mean that cash is in excess, and should rather be invested in places where it will earn a greater return
How do work out the current ratio?
Similarly to the solvency ratio, only using current assets and current liabilities instead
What is another name for the acid test ratio?
The quick ratio
What does the acid test ratio tell us?
It test the ability of a business to meet its liabilities under abnormal conditions
What kind of abnormal conditions would the acid test ratio be testing for?
Where there is a decline in sales
i.e when Stock is devalued
How is the acid test ratio different form the current ratio?
Current ratio includes stock
Acid test ratio does not
How do you work out the acid test ratio?
Similarly to the current ratio
Exclude trading Stock from the current assets figure
How do you interpret the acid test ratio?
If the acid test ratio reveals that current assets without trading Stock is less than your current liabilities, that is bad
Why is having current assets less trading Stock less than your current assets bad?
Too much money is tied up in stock
If the market crashes, the business will not be able to meet its current liabilities
