20. Analysis and evaluation of financial information Flashcards
(26 cards)
Gross profit margins ((Gross Profit/Revnue) x 100) and markup ((Gross profit/Cost of Sales) x 100) examine the relationship between selling price and the cost of goods that are sold.
True or False
and why?
True
They are key indicators of profitability and pricing efficiency in a business
Gross Profit Margin tells you what percentage of the revenue is profit after covering the direct costs of producing or buying the goods.
Markup shows how much you need to add cost price to reach the selling price; ensuring a business covers all its costs and generates a desired profit
What is the gross profit margain formula
Gross Profit / Revenue x 100
What is the markup formula
Gross Profit - Cost of Sales x 100
What is profit in relation to revenue formula
Profit for the year before tax/Revenue x 100
What is the return on capital employed formula
Operating profit/capital employed x100
What is the capital employed for LTD company formula
Total Equity + Non current liabilites
What is the capital employed for Sole trader formula
Capital + Non Current Liabilities
What are the profitability ratios
- Gross profit margain
- Markup
- Profit in relation to revenue
- Return on capital employed
- Capital employed for LTD
- Capital employed for sole trader
What are the solvency/Liquidity Ratios
- Current ratio = Current assets / Current Liabilities
- Liquid Capital ratio = Current assets (except iventory) / Current liabilities
What’s the formula for current ratio
Current Assets/Current liabilities
NOTE: These answers are stated as ratios and to 2 decimal places. E.g 1.25: 1 or 0:75: 1
What is the formula for liquid capital ratio
Current assets (except inventory) / Current Liabilities
NOTE: These answers are stated as ratios and to 2 decimal places. E.g 1.25: 1 or 0:75: 1
What are the efficiency ratios
- Expenses in relation to revenue
- Inventory turnover (times)
- Inventory turnover (days)
- Average inventory
- Trade receivable days
- Trade payable days
What is the formula for expenses in relation to revenue
(Expenses / Revenue) x 100
What is the formula for inventory turnover (times)
EBI /w definition
Cost of sales / Average inventory
This means how many times a business gets through its average inventory in a year
What is formula for inventory turnover (days)
EBI /w definition
(Average inventory / Cost of sales) x 365
This means how many days on average inventory is held before being sold
Average inventory formula
(Opening inventory/Closing inventory) / 2
Trade receivable days formula + definition
Trade receivables / Credit sales x 365
It means how many days credit customers take to pay for goods or services
If a figure for credit sales isn’t available, use the figure for revenue
Trade payable days formula + definition
Trade payables/Credit purchases x 365
It means how many days the b usiness takes to pay its credit suppliers.
If credit sales figure is unavaliable use purchases figure
If that isn’t avaliable use cost of sales figure
How to increase the mark up
Higher selling prices, without cost of sales increasing
Lower purchase price without selling price decreasing
More efficient use of inventory, with less wastage
How to increase profit in relation to revenue
Achieve higher sales revenue without an increase in cost of sales/expenses
Higher gross profit margin without a larger increase in expenses
Achieve lower expenses/costs of sales without decreasing sales revenue
How to improve the current ratio
Sell unneeded non-current assets
Additional long term borrowing (eg debenture/bank loan)
How to improve the liquid capital ratio
Reduce the amount of inventory being held, if necessary by reducing the selling price of old inventory
Sell unneeded non current assets
What does the ratio, expenses related to revenue, mean
E.g 42%
for every £1 of revenue there will be 42p expenses
An increase of expenses in the ratio shows the business struggles to manage it’s expenses, decreasing financial efficiency
What does the ratio, inventory turnover, mean
E.g 3%
A business sold its average inventory three times during the year
Increase in this ratio is good as it indicates high sales and improves cash flow and improve financial efficiency
