Accounting Ratios Flashcards
(28 cards)
what are the 5 ratio classifications?
- Profitability
- Efficiency
- Liquidity
- Financial Gearing
- Investment
what ratios are most value to long-term lenders?
- Profitability
- iNvestment
- Gearing
what ratios are most value to short-term lenders?
- Liquidity
what can be used to compare a ratio?
- Past Periods
- Similar Businesses
- Planned performance
what is the formula for ROCE?
Operating Profit / Equity + Long term loans X 100
how do you work out capital employed?
Total Equity + Non-current liabilities
what does ROCE used for?
To establish targets of profitability, if the percentage is low this suggests poor performance
what is the formula for operating profit margin ?
Operating profit / Sales Revenue X 100
what influences Operating profit margin for a business?
- degree of competition
- type of customer
- economic climate
- industry characteristics (level of risk)
what is the formula for Gross profit margin?
Gross profit / Sales Revenue X 100
what are the main efficiency ratios?
- Average inventories turnover period
- Average settlement period for trade receivables
- Average settlement period for trade payables
- sales revenue to capital employed
- sales revenue per employee
what is the formula for average settlement period for trade payables?
Average trade payables / Credit Purchases X 365
what are the main liquidity ratios?
- Current ratios
2. Acid Test ratio
what is the formula for current ratio?
Current assets / Current Liabilities
what is the formula for Acid Test Ratio?
Current Assets - investors / Current Liabilities
If the liquidity ratio was 0.8:1, what does this suggest?
Shows that the ‘liquid’ current assets do not quite cover the current liabilities, so the business may be experiencing some liquidity problems
what are the main financial ratios?
- Gearing ratio
2. Interest cover ratio
what is the formula for Gearing ratio?
Long term (non-current) liabilities / Equity + Long term (non-current) liabilities X 100
what is the formula for Interest cover ratio?
Operating profit / Interest payable
what do gearing ratios do?
assesses the relationship between equity and debt financing
what do investment ratios do?
assesses the returns to shareholders
what are the limitations of Ratio Analysis?
- due to the quality of financial statements, some key ratios will fail to acknowledge errors such as an suggesting a brand and goodwill is an asset.
- Inflation - historic values have little relation to current values and so comparisons between periods will be hindered / also Distorts the measure of profit as cost of sales is a historic cost resulting in understated expenses and overstated profits
- ratios give a restricted view
Formula for dividend cover?
Profit after Tax / Dividends paid
Formula for dividend per share?
dividends paid / No. of shares
