Useful ratios

Question 1

gross profit margin

Answer 1

gross profit/revenue x 100

assess profitability before taking overheads into account

Question 2

operating margin

Answer 2

operating profit or PBT/revenue x 100

assess profitability after taking overheads into account

Question 3

return on capital employed

Answer 3

operating profit or PBIT/equity + debt x 100

measure of how effectively resources are used to generate profit

Question 4

current ratio

Answer 4

current assets/current liabilities

assess ability to pay current liabilities from current assets

Question 5

quick ratio

Answer 5

current assets excluding inventory/current liabilities

assess ability to pay current liabilities from the most liquid assets

Question 6

gearing

Answer 6

net debt/equity

assess reliance on external finance

Question 7

interest cover

Answer 7

profit before interest payable/interest payable

assess ability to pay interest charges

Question 8

receivables days

Answer 8

trade receivables/revenue x 365

assess the average time taken to collect cash from credit customers (in days)

Question 9

inventory days

Answer 9

inventory/cost of sales x 365

assess the average time for which inventory is held (in days)

Question 10

payables days

Answer 10

trade payables/purchases x 365

assess the average time taken to pay suppliers (in days) which may reflect ability to pay