Chapter 12 - ratios Flashcards
(13 cards)
Gross Profit Margin
GrossProfitMargin
Formula:
(GrossProfit/
Revenue) × 100
Measures: Profitability before overheads.
Why it matters: Shows how efficiently a business produces goods or services compared to its sales.
Aged Receivables Days
AgedReceivablesDays
Formula:
(TradeReceivables/
CreditSales) × 365
Measures: Average number of days it takes customers to pay.
Why it matters: High numbers can signal cash flow problems or ineffective credit control.
Net Profit Margin
NetProfitMargin
Formula:
(NetProfit
Revenue) × 100
Measures: Overall profitability after all expenses.
Why it matters: Indicates how much of each pound/dollar of revenue is retained as profit.
Operating margin
(Operating profit/
Revenue) × 100%
Assess profitability after
taking overheads into
account
Return on capital employed
(Operating profit/
(Equity + debt)) × 100%
Measure of how
effectively resources are
used to generate profit
Current ratio
Current assets/
Current liabilities
Assess ability to pay
current liabilities from
current assets
Quick ratio
Current assets excluding inventory/
Current liabilities
Assess ability to pay
current liabilities from
reasonably liquid assets
Gearing ratio
= Debt/equity
OR
= Debt/ (debt + equity)
Assess reliance on
external finance
Interest cover
Profit before interest payable/
Interest payable
Assess ability to pay
interest charges
Trade receivables
collection period
(Trade receivables/
Revenue) × 365
Assess the average time
taken to collect cash from
credit customers
Inventory holding
period
(Inventory /
Cost of sales ) X 365
Assess the average length
of time inventory is held
Trade payables
payment period
(Trade payables /
Purchases) X 365
Assess the average time
taken to pay suppliers
