F3-6 Financial ratios Flashcards
(25 cards)
What is the formula for gross profit margin ?
Gross profit margin = Gross profit/ sales x100
What is the formula for net profit margin ?
Net profit margin= Net profit / sales x 100
What is the formula for return on capital employed (ROCE)
Return on capital employed = Net profit / capital employed x 100
What is the formula for mark up
Mark up = Gross profit / cost of sales x 100
How do changes in cost of sales influence the profitability ratios ?
An increase in the cost of sales/ cost of goods sold assumes sales remain constant
It will lead to decrease in the gross profit % of sales and hence a decrease in the net profit % of sales
How do changes in expenses or overheads influence the profitability ratios ?
An increase in the expenses/ overheads
Will lead to decrease in the net profit % of sales
3 ways on How can a business Improve its profitability ratios ?
Improving profitability by increasing sales but without increasing the cost of goods sold in the same proportion
Reduce the cost of its purchases such as a cheaper supplier
Reduce overheads
What does Liquidity mean ?
It measures the ability of a firm to find cash to pay what it owes
What are the 2 types of Liquidity ratio ?
Current Ratio and Liquid Capital Ratio
What does current ratio look at and assess ?
It looks at the relationship between current assets and current liabilities
Assesses the current liquidity position of the firm.
What is the formula for Current Ratio ?
Current Ratio = Current Assets / Current Liabilities
What does Liquid Capital Ratio Examine ?
It examines the businesses liquidity position by comparing current assets and liabilities but removes Inventory from the total of current assets
What is the formula for Liquid Capital ratio ?
Liquid capital ratio = Current assets - inventory / capital liabilities
Why do you think that inventory is not included as a measure of liquidity ?
Hardest thing to turn into cash without losing its value
Can take a long time to convert cash into inventory
Inventory may be old and thus unsellable
By removing inventory , a tougher measure is in place
How can Liquidity be improved ?
Selling under - used non current assets
Raising more share capital
Increasing long term borrowing
Postponing planned investments
Managing working capital ( non current assets)
What is Efficiency ?
It is able to accomplish something with the least waste of time and effort and resources.
What do efficiency ratios tend to ?
They tend to assess how well management is controlling key aspects of the business primarily - It’s inventory and its finances
What is the meaning of trade receivable days ?
This measures how long on average it takes for debtors to pay
What is the meaning of trade payable days ?
This measures on average how long it takes a firm to pay for goods and services bought on credit.
What is the meaning of inventory turnover ?
This measures the average amount of time inventory (stock) is held by a business
What is the formula for trade receivable days ?
Trade receivable days = Trade Receivables/ credit sales x365
What is the formula for trade payable days ?
Trade payable days = Trade payables / credit purchases x365
What is the formula for inventory turnover ?
Inventory turnover= Average Inventory/ cost of sales x 365
Why is ratio analysis useful ?
It allows analysis of relative performance between years - can identify trends is the business improving or declining
Comparisons can be made with other businesses - if information is provided
Provides a measure of liquidity , profitability and efficiency of the business
Ratios are accepted business measurements
Provide a systematic approach to analysing performance
Simplifies the interpretation of financial statements
Provides summarised data for stakeholders.
Ratios can identify areas of strength and areas of weakness that can be improved
