Financial Ratios

Question 1

Profitability Ratios

Answer 1

ROCE
Asset Turnover
Gross Profit
Gross Profit Margin
Net Profit Margin
Operating Expenses

Question 2

ROCE - Return of Capital employed

Answer 2

PBIT/ (Equity + L/T Loans) x 100
= Profit before Interest and Tax / (Equity + Long term Loans) = [Capital employed] x 100

Measures how well a company is making a profit from its capital employed.

Question 3

Asset Turnover

Answer 3

Sales / Capital Employed x 100
= Sales (Revenue)/ (Equity + L/T Loans) x 100

It measures the efficiency of a company in generating sales from its capital employed.

Question 4

Gross Profit

Answer 4

Sales (Revenue) - COGS
= Revenue - Cost of sales/ goods or services sold.

It is the difference.

Question 5

Gross Profit Margin

Answer 5

(Gross Profit / Sales) x 100

Question 6

Net (Operating) Profit Margin

Answer 6

(PBIT/ Revenue) x 100

The Net Profit Margin shows the percentage of sales that remains as profit after deducting both the cost of sales and operating expenses (PBIT)

Question 7

Operating Expenses/ Sales Ratio (Administrative expenses)

Answer 7

Operating Expenses/ Sales x 100

This ratio measures the percentage of sales spent on operating expenses.

Question 8

Liquidity Ratios

Answer 8

Current Ratio
Quick/ Liquid Ratio

Question 9

Current Ratio

Answer 9

Current Assets / Current Liabilities

Question 10

Liquid/ Quick Ratio

Answer 10

(Current Assets - Inventories) / Current Liabilities

Question 11

Efficiency Ratios

Answer 11

Inventory Holding Period
Trade Receivables Collection Period
Trade Payable Collection Period
Cash-to-cash Cycles

Question 12

Inventory Holding Period

Answer 12

(Closing Inventory / Cost of Sales) x 365

Question 13

Trade Receivables Collection Period

Answer 13

(Closing Trade receivables / Credit sales (Revenue)) x 365

Question 14

Trade Payable Collection Period

Answer 14

(Closing Trade Payables / Credit Purchases) x 365

Question 15

Cash-to-Cash Cycle

Answer 15

Inventory days + Receivable days - Payable days

Question 16

Inventory Turnover

Answer 16

Cost of Sales / Inventory

Question 17

Capital Structure Ratios

Answer 17

Gearing I
Gearing II
Gearing III
Interest Cover

Question 18

Gearing I

Answer 18

L/T Debt / Equity
= Non-current liabilities / Equity x100

Question 19

Gearing II

Answer 19

L/T Debt / (L/T Debt + Equity) x 100

Question 20

Gearing III

Answer 20

(Net debt / Equity) x 365

Question 21

Interest Cover

Answer 21

PBIT/ Finance Cost
= PBIT / Income tax

Question 22

Investment Ratios

Answer 22

ROE - Return on Equity
EPS - Earnings per share
PE - Price / Earnings ratio
Dividend per share
Equity Dividend cover
Dividend yield

Question 23

ROE - Return on Equity

Answer 23

(Profit at the end of the period / Total Equity) x 100

Question 24

EPS - Earnings per Share

Answer 24

Profit at the end of a period / no. of equity shares

Question 25

P/E Ratio - Price per Earning Ratio

Answer 25

Market price per share / Earnings per share

Question 26

Dividend per Share

Answer 26

Total equity dividends / no. of equity shares

Question 27

Number of Equity Shares

Answer 27

Ordinary share capital / shares (p or £)

Question 28

Dividend cover

Answer 28

Profit at the end of the period / total equity dividend

Question 29

Dividend yield

Answer 29

(Dividend per share / Market price per share) x 100