Profitability / efficiency ratios

Question 1

3 efficiency ratios and how to Calculate

Answer 1

Receivable days - receivables/sales revenue x365

Payable days - payables / cost of sales x365

Inventory turnover - cost of sales / average inventory held

Question 2

Explain inventory turonover

Answer 2

Expressed as times
Look for changes from one year to another
Depends on shop
Compare to industry average

Question 3

3 types of profitability ratio and how to calculate?

Answer 3

Gearing ratio - long term liabilities/capital employed x100

Return on capital employed - operating profit / capital employed x100

Current ratio - current assets / current liabilities ability to meet short term debts

Question 4

Explain gearing ratio

Answer 4

Measure of debt to equity (funded by long term loans)

Capital employed - total equity plus non current liabilities

0-25 lowly geared
25-50 moderately geared
50plus highly geared

Question 5

Explain return on capital employed

Answer 5

How effectively a business is at using capital to generate profits

Higher the better

Compare to industry average and previous years

Question 6

Explain current ratio

Answer 6

Ability to meet short term debts

Expressed as a ratio

1.5:1 is considered healthy
Less than 1:1 is vulnerable