Ratio Analysis Flashcards
what is a ratio?
a ratio is the number of times one number contains the other number
what are the 4 Types of ratios used to analyse financial reports?
- profitability (earning capacity)
- Management effectiveness
- Financial Stability
- Cash Flow
What do Profitability Ratios show?
- Show the ability of the enterprise to earn income within the present financial structure of the enterprise
what is the Gross Profit Ratio formula?
Gross profit / net sales x 100
what is the Net Profit Ratio formula?
Net Profit / Net Sales x 100
what does a high ratio indicate?
opportunity to make high profits
what does a Low ratio indicate?
less opportunity for profits and should investigate:
what are some methods to controlling expenses
- Pricing practices
- Selling techniques
- Increase sales through advertising
what is the return of equity formula?
Net Profit / average Owners equity x 100
how can a ratio be improved?
- by increasing profit (by methods mentioned above)
- decreasing owner’s equity
what is the Return on total Assets formula?
Net profit + interest Expense / Average Total Assets x 100
what are the three Ratio formulas of expenses to sales
- Selling & distribution Expenses / Net Sales x 100
- General & Administrative Expenses / Net Sales x 100
- Finance Expense / Net Sales x 100
what is the rate of turnover of inventories formula?
Cost of Goods Sold / Average inventories
