Formulae

Question 1

Gross Profit Margin

Answer 1

(Gross Profit / Sales Revenue) x 100

Given as a Percentage. (%)

It is used for a comparison as to how well the gross profit is doing between years and competitors. The greater the margin, the more better it is doing.

Question 2

Operating Profit Margin

Answer 2

(Operating Profit / Sales Revenue) x 100

Given as a percentage. (%)

It compares how well the operating profit is doing between years and competitors. The higher, the better it is for the business. The operating profit is used before tax.

Question 3

Current Ratio

Answer 3

(Current Assets / Current Liabilities)

There is no unit, just a numerical value.

It shows whether or not the business has sufficient assets to cover their short term liabilities. A good answer/it is advisable to get an answer between 1.5 and 2.

Question 4

Acid Test Ratio

Answer 4

(Current Assets - Inventory / Current Liabilities)

There is no unit, just a numerical value.

It shows if the business has sufficient liquid assets in order to pay off their short term liabilities. A good range is 1.2 < R < 1.5. So it is between 1.2 and 1.5.

Question 5

Working Capital

Answer 5

(Current Assets - Current Liabilities)

There is no unit, just a numerical value.

It is how much cash the business has to pay their running costs and possibly an emergency expense in case if something happens, or if there are any extenuating circumstances.

Question 6

Return On Capital Employed

Answer 6

(Operating Profit / Capital Employed) x 100

The unit is expressed as a percentage (%)

The higher the amount, the better it is for the business. It should be compared with previous information, and that it could be compared to a competitor.

Question 7

Depreciation

Answer 7

(Original cost of asset - residual value) / (Useful life of the asset)

Question 8

Break-Even Point

Answer 8

(Fixed Costs) / (Contribution)

It is expressed as a number of units. It is how many items you would need to sell in order to cover all of your costs. The point at which you NEITHER make a loss or profit is when the BEP occurs.

DO NOT round up or down if it is a fraction, just like in A-Level Mathematics, keep it in exact form.

Question 9

Margin of Safety (MOS)

Answer 9

(Current level of output - BEP)

Question 10

Market Share

Answer 10

(Total Sales/Shares in the business / Total Sales/Shares in the industry OR market.)

It is expressed as a percentage. It tells businesses who the leading marksman is in the market. It is whoever the market leader is for that industry, for instance Formula One and their role in absolutely dominating the motor sporting world, similar to Redbull Racing in 2023 :)

Question 11

Income Elasticity of Demand (YED)

Answer 11

(Percentage Change in the demand for a product / Percentage Change in consumer incomes)

It is just a numerical value, for instance, 1, 0.12, 0.273 etc.

It shows whether a good is normal, it means that the answer is positive and that it is between zero and one. Example - if it is 0.12 it is a normal good since 0.12 > 0, and that 0 < 0.12 < 1.

If it is inferior, it means that the answer is negative! For instance if it is -0.138, that it is an inferior good since -0.138 < 0.

Question 12

Labour Turnover

Answer 12

(Number of staff leaving in ONE year / The average number of people that are employed)

It is expressed as a percentage

The greater the figure, the worse it is because there is low morale for working for that business.

Question 13

Labor Productivity

Answer 13

(Total output in a time period / Total workers employed)

It represents the number of units per worker.

If there is a good value, it means that it is better for the business since it keeps their cost per unit low, indicating a possible strategy of bulk buying, encouraging economies of scale.

Question 14

Absenteeism

Answer 14

(Number of employees absent / Total number of employees) x 100!! DO NOT FORGET THE x100!!!! It is because it is expressed as a percentage.

It shows an indication of staff morale.

Question 15

Price Elasticity of Demand

Answer 15

(Percentage Change in Quantity Demanded / Percentage Change in price)

It is just a number. For example, it could be 1.543, 0.234, or even -1.213.

If PED is between 0 and 1, it is inelastic, if it is above 1, it means that it is inelastic. If the answer is a negative, think of it as the modulus, for example if it is -1.213, then do |-1.213| to get 1.213.

Question 16

Promotional elasticity of demand

Answer 16

(Percentage change in the demand for the product / percentage change for promotional spending)

It is a number. If the result is greater than one, it means that the demand is said to be elastic following a change in promotional spending

Question 17

Cross elasticity of demand

Answer 17

(% change in demand for good A / % change in price for good B)

It is a number. If the result is negative than the two goods are compliment. If they are positive it means that they are substitute goods.

Question 18

Capital Productivity

Answer 18

(Output / Capital Employed)

It is expressed as a number. It allows the business to see how much machinery is contributing to production levels.

Question 19

Total Float

Answer 19

(LFT - Duration - EST)

It is expressed as a number. It is the amount of time that an activity can be delayed without delaying the entire project duration.

Question 20

Free Float

Answer 20

(EST (Next Activity) - Duration - EST (Current Activity))

It is expressed as a number. It is the length of time, taking into consideration the start of the following activities, that an activity can be delayed by.

Question 21

Contribution

Answer 21

(Selling Price - Variable Costs)

It is expressed as a number. It is how much the item is contributing towards paying off the fixed costs or profit if costs have been paid.

Question 22

Capital Employed

Answer 22

(Non Current Assets + Current Assets) - (Current Liabilities)

OR

(Non Current Liabilities + Equity)

It is expressed as a number. The equity is expressed as the share capital + retained earnings.

Question 23

Inventory turnover ratio

Answer 23

(Cost of goods sold / Value of inventories)

It is expressed as a number. It is how many times in a year that the stock is replenished. With Just In Time stock control, there would be a high number.

Question 24

Days Sales in receivables ratio

Answer 24

(Trade Accounts Receivables / Revenue) x 365

It is expressed in days. It is how long it takes for the business to collect money that is owed to them. Shorter is better for the business to manage its cashflow. It is good management for the business.

Question 25

Payables Days

Answer 25

(Trades payables / Cost of sales) x 365

It is expressed as the number of days. It tells you how long it takes the business to pay their bills to suppliers. If it is too high, it could damage their relationship with the supplier and leads to mismanagement in cash flow.

Question 26

Dividend Yield Ratio

Answer 26

(Dividend per share / Current share price) x 100

It is expressed as a percentage. it is the rate of return for the shareholder at that current share price.

Question 27

Dividend Per Share

Answer 27

(Total annual dividends / Total number of shares issued)

It is expressed as a monetary value. It is how much a shareholder can expect to receive in dividends per share that they own.

Question 28

Dividend cover ratio

Answer 28

(Profit for the year / Annual Dividends)

It is just a number. It is the number of times that the share dividend could have been paid out of the profits. If it is high, it means that they could question why they were not given more.

Question 29

Price earnings ratio

Answer 29

(Current Share Price / Earnings per share)

It is just a number. The earning per share is defined as the profit for the year / the number of shares that are issued. It means that the confidence is reflected in the future prospects of the business.

Question 30

Gearing

Answer 30

(Non Current Liabilities / Shareholder’s equity + Non Current Liabilities) x 100.

It tells the degree to which the business is financed through long term loans.