financial ratio analysis Flashcards
(16 cards)
Profitability ratios include
gross profit margin and net profit margin
Gross Profit Margin =
Gross Profit/Revenue (x100 for %)
Businesses prefer a higher GPM because
it shows they are being more effective in retaining revenue as profit
Factors affecting GPM are
sales price per unit, cost of sales per unit
Net Profit Margin =
Net Profit/Revenue (x100 for %)
Net profit is
profit after deducting all expenses
Cost of sales per unit means the NPM
increases
Businesses prefer a higher NPM because
it shows they are being affective in retaining revenue as profit
Factors affecting NPM include;
sales price per unit (GPM), cost of sales per unit (GPM), all other expense lines per unit
Investor risk ratios include;
Interest cover and Gearing
Interest cover =
Operating profit/Interest expense
Interest cover is defined as
the amount of operating profit available to cover interest that must be paid
Investors prefer a higher interest cover because
the business will be more likely to pay interest charges
Gearing =
Debt finance (non-current liabilities)/Equity finance (x100 for %)
Gearing is defined as
calculating how much debt a company has, highlighting how borrowing money has risks
Businesses prefer lower gearing because
it shows there is a lesser risk of bankruptcy (higher % = higher risk)
