CALCULATIONS

Question 1

Return on capital investment

Answer 1

Purpose: to see whether a business is benefiting from their capital, or if its negatively affecting the business

Formula: operating profit/capital employed x 100

Normal range = HIGH

Question 2

Profit for the year margin

Answer 2

Purpose: to asses the company’s performance for the year

Formula: Net income/ Net sales (Revenue)

Normal range = HIGH

Question 3

Gearing ratio

Answer 3

Purpose: Focus on capital structure of the business - proportion of finance provided by debt relative to finance provided by equity.
Also concerned with liquidity

Formula = NCL/Total equity + non-current liabilities (Capital employed) x100

Question 4

Current ratio

Answer 4

Purpose: Used to assess whether a business has sufficient cash to pay its debtors

Formula: Current assets/Current liabilities
Normal range = between 1.0 - 2.0

Question 5

Receivable days

Answer 5

Purpose: Measure of average number of days it takes a company to collect payment

Formula: account receivable/Total credit sales (Revenue) x 365

Question 6

Inventory turnover

Answer 6

Factors influencing: nature of product, importance of holding inventory, length of product life cycle

Formula: cost of goods sold/average inventories held

Question 7

Payables days

Answer 7

Purpose: estimates averages time it takes a business to settle its debts with trade suppliers

Formula: Payable days/Cost of sales x365