3.5 + 3.6 Ratios Flashcards
(17 cards)
Liquidity ratios
Look at the ability of a firm to pay its short-term liabilities, such as by comparing working capital to short-term debts.
Current ratio
Current assets/Current liabilities
Must be at minimum 1:1
Acid test ratio
(Current assets-Stock)/Current liabilties
Less than 1:1 means liquidity problem
Capital employed
The value of all long-term sources of finance for a business, e.g. bank loans, share capital and accumulated retained profit.
Profitability ratios
Examine profit in relation to other figures, e.g. the GPM and NPM ratios. These ratios tend to be relevant to profit-seeking businesses rather than for not-for-profit organizations.
Gross profit margin
Gross profit/Sales revenue x 100
The higher the better
Profit margin
PBIT/Sales revenue x 100
The higher the better
Efficiency ratios
Indicate how well a firm’s resources have been used, such as the amount of profit generated from the available capital used in the business.
Stock turnover
(Number of times) Cost of sales/Average stock
(Number of days) Average stock/Cost of sales x 365
Average stock
(Opening stock + Closing stock)/2
Debtor days
(Debtors/Total sales revenue) x 365
The shorter the better
Creditor days
(Creditors/Cost of sales) x 365
The longer the better
Gearing ratio
(Non-current liabilities/Capital employed) x 100
The lower the better
Capital employed
Non-current liabilities + equity
Liquid assets
The possessions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock and debtors.
Liquidity crisis
A situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets.
Return on capital employed
(PBIT/Capital employed) x 100
The higher the better
