Lecture 5a Flashcards
What is ratio analysis used for?
used to highlight underlying trends not always immediately obvious from figures
How do you calculate the ROCE (return on capital employed)?
Operating profit/capital employed ( shareholders funds +long term loans) x100
(shareholder funds are share capital + reserves)
How do you calculate the gross profit margin?
Gross profit/ turnover x 100
How do you calculate net profit margin?
net profit before tax/ turnover x 100
How do you calculate operating profit margin?
operating profit/ turnover x 100
How do you calculate expenses:sales?
Expenses/turnover x 100
How do you calculate net assets?
total assets (non current and current)- total liabilities (current liabilities)
How do you calculate ROCE ratio?
operating profit margin x use of assets
What is liquidity?
The level of cash, bank and other liquid assets available to the business
What is the current ratio formula?
current assets/ current liabilities:1
What is the acid test ratio formula?
(current assets- inventories)/ current liabilities :1
What is working capital?
The amount invested in the short term assets of a business e.g inventories, short term receivables and cash balance less short term liabilities (current assets less current liabilities)
How do you calculate inventory days?
inventories/ cost of sales x 365 days
How do you calculate inventory turnover/ rate of stock turnover?
cost of sales/ average inventory holding during the year
average inventory = (beginning inventory+end inventory)/2
How do you calculate debt collection period
Trade receivables/ annual credit sales x 365 days
How do you calculate credit payment period?
Trade payable/ annual credit purchases x 365 days
How do you calculate gearing or capital gearing ratio?
NCL/(NCL+shareholder funds)x100=x %
What is gearing?
It measures the extent to which a business is financed by debt rather than equity capital
What is considered low level of gearing?
Gearing less than 10%
What is considered a high level of gearing?
Gearing is more than 50%
What is interest cover?
It tells you how many times the operating profit covers the interest
How do you calculate interest cover?
operating profit/ interest expense= x times
How do you calculate earnings per share (EPS)?
Profit after tax/ number of ordinary shares issued
How do you calculate price to earnings (PE) ratio?
Market price of share/ earnings per share
