Week 7: Analysing and Interpreting Financial Statements

Question 1

How do you calculate Gross Profit Margin?

Answer 1

Gross Profit/ Sales Revenue * 100

Question 2

How do you calculate Operating Profit Margin?

Answer 2

Operating Profit/ Sales Revenue * 100

Question 3

How do you calculate Return on Capital Employed (ROCE)?

Answer 3

Operating Profit/ (Share Capital + Reserves + Non-Current Liabilities) * 100

Question 4

How do you calculate Return on Ordinary Shareholders’ Funds (ROSF)?

Answer 4

Profit for the year (less any preference dividend)/ (Ordinary Share Capital + Reserves) * 100

Question 5

How do you calculate Working Capital?

Answer 5

Current Assets - Current Liabilities

Question 6

How do you calculate Average settlement period for trade receivables?

Answer 6

Average Trade Receivables/ Credit Sales Revenue * 365

Question 7

How do you calculate Average settlement period for trade payables?

Answer 7

Average Trade Payables/ Credit Purchases * 365

Question 8

How do you calculate Average Inventories’ turnover period?

Answer 8

Average Inventory/ Cost of Sales * 365

Question 9

How do you calculate Current Ratio?

Answer 9

Current Assets/ Current Liabilities

Question 10

How do you calculate Quick (or Acid-test) Ratio?

Answer 10

(Current Assets - Inventory)/ Current Liabilities

Question 11

How do you calculate Gearing Ratio?

Answer 11

Non-current Liabilities/ (Share capital + Reserves + Non-current Liabilities)

Question 12

How do you calculate Interest Cover Ratio?

Answer 12

Operating Profit/ Interest Payable

Question 13

How do you calculate Earnings Per Share (EPS)?

Answer 13

Profit for the year (less any preference dividend) / Number of Ordinary Shares Issued

Question 14

How do you calculate Dividend Pay-out Ratio?

Answer 14

Dividends Announced / Earnings Available for Dividends

Question 15

How do you calculate Dividend Cover Ratio?

Answer 15

Earnings Available for Dividends / Dividends Announced

Question 16

How do you calculate Dividend Yield Ratio?

Answer 16

Dividends per Share/ Market Value per Share

Question 17

How do you calculate Price/Earnings (P/E) Ratio?

Answer 17

Market Value per Share/ Earnings per Share (EPS)

Question 18

What are the five categories of Ratios and provide a brief explanation of each?

Answer 18

1. Profitability: Assessing business’ effectiveness in generating profit
2. Efficiency: Assessing business’ efficiency in using assets/resources
3. Liquidity: Assessing business’ ability to meet short-term obligations
4. Financial Gearing: Assessing the relationship between equity and debt financing
5. Investment: Assessing returns to shareholders