Ratios & Ratio Analysis Flashcards
What is ratio analysis, and when is it the most beneficial?
A method of examining the performance of an organisation.
Most beneficial when several years business accounts are compared using the same ratios, to allow trends to become apparent about past performance and what could happen in the future.
What are the three PROFITABILITY ratios?
Gross profit margin
Net profit margin
Return on total capital employed
What is the Gross Profit Margin Ratio?
(Gross profit ➗ Sales) x 100 = X%
What is the Net Profit Margin Ratio?
(Profit before interest/tax ➗ Sales) X 100 = X%
What do the Gross and Net Profit Margin Ratio’s show?
Indicates the percentage of sales value that a firm has retained as profit. Takes account of overheads/expenses the business has occurred.
What is the Return on Total Capital Employed Ratio?
(Profit before interest/tax ➗ Total capital employed) X 100 = X%
What does the Return on Total Capital Employed Ratio indicate?
Indicates the total amount of Return a stakeholder will get, in terms of the Total Capital put into the business.
Includes shareholder funds and all long-term loans/debts.
What are the 6 LIQUIDITY/WORKING CAPITAL Ratios?
Current Ratio Quick (acid test) Ratio Inventory Turnover Ratio Receivables Collection Time Ratio Payables Payment Time Ratio Gearing Ratio
What is the Current Ratio, and what does it indicate?
Current Assets ➗ Current Liabilities = X
Discovers whether the company has enough cash or cash equivalent assets to continue operation and cover its short-term liabilities.
What is the Quick (acid test) Ratio, and what does it indicate?
(Current assets - Inventory) ➗ Current Liabilities = X
Discovers whether the company has enough cash or near cash assets (good ‘debtors’ and short-term investments) to pay immediate debts.
What in the Inventory Turnover Ratio, and what does it indicate?
(Average Inventory x 365) ➗ Cost Of Sales = X Days
Indicates how often inventory held by a company is sold during the period under consideration.
Average Inventory = (Opening + Closing Inventory) ➗ 2
What is the Receivable Collection Time Ratio, and what does it indicate?
(Receivables ➗ Sales on Credit) x 365 = X Days
Indicates the average length of time it is taking for receivables (customers on credit) to pay the company the money they owe.
What is the Payables Payment Time Ratio, and what does is indicate?
(Payables ➗ Purchases on Credit) X 365 = X Days
Indicates the average length of time it is taking for the company to pay its payables (money owed to suppliers).
What is the Gearing Ratio, and what does it show?
Long term debts ➗ (long term debts + capital) X 100
Indicates the financial leverage of the business, to fully analyse the overall performance.
