FINANCIAL RATIOS

Question 1

Current ratio Formula?

Answer 1

Current Assets / Current Liabilities

• Measures LIquidity
• Recommended 1.5:1 - 2:1

Question 2

Debt to Equity Ratio Formula?

Answer 2

Total liabilities / Total equity x 100
- Measures solvnecy (gearing)
- Recommended: less than 0.50

Question 3

Gross Profit Ratio Formula

Answer 3

Gross profit / sales x 100
- Measures cost control and pricing
- Higher is better (generally above 30%-40%)

Question 4

Net profit Ratio Formula?

Answer 4

Net Profit / Sales x 100
- Measures overall profitability
- Higher the better

Question 5

Return on equity formula?

Answer 5

Net profit / owner’s equity x 100
- Measures return to owners/investors
- Higher the better

Question 6

Expense formula ratio?

Answer 6

Total expenses / sales x 100
- Measures efficiency of cost control
- Lower is better - aim for <50% depending on industry

Question 7

Accounts receivable turnover ratio formula?

Answer 7

Sales / Accounts Receivable
- Measures how quickly debt is collected
- Higher is better
- Ratio can be divided by 365 to show average days of time taken.