Accounting Ratios

Question 1

Net Working Assets to Sales Revenue

Answer 1

CA - CL / Revenue

Question 2

Interest Cover

Answer 2

Profit from Operations / Interest payable

Question 3

Gearing

Answer 3

Non-CL / Non-CL + Equity

Question 4

Earnings per share

Answer 4

Profit for the year / Issued ordinary shares

Question 5

Price/Earnings

Answer 5

Market price per share/Earnings per share

Question 6

Dividend Yield

Answer 6

Dividend per share/Market price per share

Question 7

Return on capital Employed

Answer 7

PROBIT / equity + non-current liabilities

Question 8

Non-Current Asset Turnover

Answer 8

Net Revenue/ NBV of NCAsset

Question 9

Analysis of Net working assets ratio

Answer 9

SMALLER is better
- Gives an indication as to how efficiently the net working assets are being used to generate sales.
- A smaller percentage should be generating large amounts of revenue

Question 10

Analysis of Interest Cover ratio

Answer 10

LARGER is better
- Shows how many times the interest payable can be payed using the profit from operations
- Provides a safety margin against a fall in profit.

Question 11

Analysis Gearing ratio

Answer 11

SMALLER is better
- Above 50 % is associated with high risk.
- Means a debt is in large proportion to the share capital.
- This poses financial risk.

Question 12

Analysis of Earnings per share

Answer 12

LARGER is better
- Shows that more earnings can be attributed to one share.
- This is appealing to investors.

Question 13

Analysis of Price/Earnings ratio

Answer 13

LARGER is better
- This shows the confidence investors have in the business future profits.
- Calculates what multiple of the market price is being paid for the shares.

Question 14

Analysis of Dividend yield

Answer 14

LARGER is better
- Shows the return shareholders are actually getting.
- Can be affected by external forces such as an increase or decrease in market price.