More Ratios Flashcards
(18 cards)
What are the profitability ratios?
4
Gross profit margin
Net profit margin
Overheads to sales ratio
Return on capital employed
Gross profit ratio
What’s the equation?
When will the value decrease?
Gross profit/sales x 100
If selling price decreases or cost of making increases
Liquidity ratios
What do they show?
What are they?(5)
Ability of a company to meet financial obligations Current ratio Quick (acid) ratio Inventory turnover Receivables payable period Payables payment period
Current ratio
What is the equation?
What is it the ratio of?
What makes assets and liabilities current?
Current assets/current liabilities
Current assets to current liabilities
Liquid or payable in next 12 months
Quick (acid) ratio
What is it the ratio of?
When is 1:1 ok?
What’s the equation?
Current assets less inventory to current liabilities
If receivables pay and payables are paid at the same time business has sufficient liquid resources to meet liabilities
CA-inventory/CL
Inventory turnover
What does this represent?
What’s the equation?
What does slow turnover indicate?
Amount of time stock is held before sold
Inventory/cost of sales x 365
Stock levels are too high
Recievables collection period What does this represent? What’s the equation? Why is a high value bad? Why do we use total sales?
How long creditors take to pay
Recievables/credit sales x 365
Risk of bad debts
Because we don’t know the difference between cash sales and credit sales
Payables payment period
What does it represent?
What’s the equation?
Time taken to pay debts
Payables/ credit purchases x 365
Net profit margin What’s the equation? What does it represent? What must you state? What will it be affected by?
Operating profit/ sales x 100
Net profit as a percentage of sales
The type of profit used eg operating
Changes in gross profit margin
Overheads to sales ratio What’s the equation? When does the ratio fall? What should a business be able to do? What are overheads usually the difference between?
Overheads/ sales x 100
When sales volume increases
Increase sales without decreasing price
Gross and net profit
Return on capital employed
What’s the equation?
What are examples of capital employed?
What is the profit figure used?
PBIT/TALCL
Share capital and reserves
Gain generated from the use of capital employed
The control of working capital What can too much capital suggest? What can too little capital suggest? What is overtrading? In what type of business is overtrading common?
Inefficient use of resources that may be expensive to finance
Lead to missed trading opportunities and be a strain on liquidity
When a business carries out too much trading for the working capital invested
In rapidly expending businesses
What is working capital made up of?(5)
Inventory Receivables Payables Cash Working capital cycle
Inventory
What does a long inventory turnover period lead to?
What is this?
What may happen to slow moving inventory?
What may be lost is levels are too low? And what may happen to production levels?
Excessive inventory levels
Costly to purchase and store
Deteriorate or become obsolete
Trading opportunities and become idle
Receivables
What may excessive receivables be reflected by?
What does extensive credit delay?
What’s there a greater risk of when creditors take longer to pay?
What’s essential to a business?
What could happen if businesses don’t offer credit?
Increase in receivables collection period Receipts of cash Bad debts Good credit control system Customers may go elsewhere
Payables
Why should company’s take full advantage of credit terms?
Why must they be careful with this?
What do lengthy payable periods suggest?
Credit terms to retain money in the company
So they don’t forfeit discounts or lose credit facilities
Problems in liquidity
Cash ( held in bank account)
What will insufficient cash lead to?
What do high cash levels suggest?
Liquidity issues
Insufficient use of resources
Working capital cycle
What does this represent?
Length of time between the acquisition of an item of inventory to the receipt of money from the customer for the sale of that item
