Ratio analysis Flashcards
(20 cards)
What is Turnover
The overall business Revenue
Define Gross Profit
The difference between the revenue from selling the product and the direct costs of making it
Formula for gross profit
Sales Revenue - Costs of Sales
Formula for gross profit margin
Gross profit / Turnover x 100
Define Net profit
It is the profit that follows the reduction of all expenses from the gross profit.
Or total profit made minus all expenses
Formula net profit
gross profit - all expenses
or
TR-TC
Formula for net profit margin
net profit / turnover x 100
Formula for capital employed
Shareholders’ Equity + Non-Current Liabilities
Define ROCE
ROCE shows the profitability of the investment
This measures the efficiency with which the business generates profits from the capital invested in it.
The higher the better
Formula for ROCE
Operating (net) Profit/Capital employed x 100
Define Gearing Ratio
Gearing is a measure of how much of a company’s operations are funded using debt versus the funding received from shareholders as equity.
40-50 optimal
Formula for Gearing Ratio
Long-term liabilities/capital employed x 100
Formula for Current Ratio
Divide the current assets by the current liabilities
Formula for acid test ratio
Current assets – stocks divided by current liabilities
Define Current ratio
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.
2:1 ratio is healthy
Define Acid test ratio
The acid-test, or quick ratio, compares a company’s most short-term assets to its most short-term liabilities to see if it has enough cash to pay its immediate liabilities
2:1 ratio is healthy
Formula working capital
Current assets - Current liabilities
Define capital employed
Refers to the money invested into the business includes shareholder funds
If capital employed (shareholder funds and long term liabilities) increases what happens
If this increases it can mean that the shareholders are using capital to invest in long term expansion such as opening new locations
What are the limitations of ratio analysis
- A range of ratios is more valid – too much importance should not be attached to any single ratio.
- Major one-off transactions may distort the true performance of a company.
- The financial accounts may have been ‘window dressed’.
