Lecture 8 Flashcards
(20 cards)
Financial ratio analysis purpose
Measures short term financial performance to evaluate long-term strategy
Enables comparisons overtime (inward looking) and across firms (outward looking)
ROCE (return on capital employed)
PBIT/(total assets - current liabilities)
ROE ( return on equity)
PAT / (ordinary shares + retained earnings)
Gross margin
Gross profit / sales revenue
Operating margin
Operating profit / sales revenue
Net margin
PAT / sales revenue
Asset turnover
Sales revenue / total assets
Stock turnover (days)
Average stock / cost of sales (365)
Debtor days
(Avg. debtors / credit sales) x 365
Creditor days
(Trade payables / credit purchases) x 365
Current ratio
Current assets / current liabilities
Acid test
(Current assets - stock) / current liabilities
Gearing
Long term debt / (long term debt + equity)
Interest cover
PBIT / Interest expense
What does ROCE measure?
Efficiency of capital employed
What does stock turnover in days measure?
Days to sell stock
What does acid test ratio exclude?
Stock – it seems it’s not quickly liquid
What does the gearing ratio tell us?
The proportion of funding from debt -> higher = riskier
What is interest cover ratio?
Ability to pay interest
List one limitation of ratio analysis
Ratios don’t explain why changes happen and maybe misleading without context
