ratios needed for accounts analysis

Question 1

gross profit margin (calculation)

Answer 1

Gross profit / sales revenue x 100 = %

Question 2

gross profit margin
- the result is a % - it tells us how much gross profit (pence) the business gets for every £ they get in revenue.

Answer 2

• If the % is going up it could be because they found a cheaper supplier or buying in bulk so achieving purchasing economies of scale
• AND/OR the business has been able to increase their selling price

Question 3

operating profit margin (calculation)

Answer 3

Operating profit / sales revenue x 100 = %

Question 4

operating profit margin
- the result is a % - it tells us how much operating profit (pence) the business gets for every £ they get in revenue

Answer 4

• If the % is going up it could be because revenue is higher, gross profit is higher.
• OR expenses have been reduced eg this year the business hasn’t spent as much on marketing.
• OR staff were made redundant last year and therefore wages are lower
• OR found a new delivery company which has reduced transportation costs.

Question 5

Return on capital employed (ROCE) (calculation)

Answer 5

Operating profit / (Total equity + non current liabilities) x 100 = %

Question 6

return of capital employed (ROCE)
- the result is a % - this tells us how much operating profit the money that has been invested has generated.

Answer 6

• takes into account total equity and loans etc the business has taken out
• the % is the return, meaning you can compare the ‘return’ you would get elsewhere
• higher the %, the more efficiently the business is using the money.

Question 7

Current ratio (calculation)

Answer 7

Current Assets / Current Liabilities = Actual ratio

Question 8

current ratios

Answer 8

• compares the current assets to current liabilities.
• a business probably couldn’t sell off all its stock and needs additional capital to replace stocks - current ratio should be higher than 1 for this.
• value below 1.5 suggests a liquidity problem and that it might struggle to meet its current liabilities.

Question 9

Gearing ratio (calculation)

Answer 9

Non current liabilities / (Total equity + non current liabilities) x 100 = %

Question 10

Payables days (calculation)

Answer 10

Payables / Cost of sales x 365 = days

Question 11

Receivables days (calculation)

Answer 11

Receivables / revenue x 365 = days

Question 12

Inventory turnover (calculation)

Answer 12

Cost of goods sold / average inventories held = number of times a year