Ratios

Question 1

Gross profit percentage ratio

Answer 1

Gross profit / sales revenue x 100

Shows gross profitcompared to sales. Higher is better

Question 2

Gross profit

Answer 2

Net sales - cost of goods sold

Question 3

Net profit

Answer 3

Gross profit - expenses

Question 4

Net profit percentage ratio

Answer 4

Net profit / sales revenue x loo

Shows net profit (after expenses including tax) compared to sales. Higher is better

Question 5

Return on capital employed (ROCE)

Answer 5

Profit (before interest charges & tax) / share capital + reserves (inc retained earnings) + borrowings x 100

Enables an investor to see if the insurer is making money for them

Question 6

Trade receivables (debtor collection period)

Answer 6

Trade receivables (debtors) / sales x 365 days

Shows efficient in collecting outstanding payments. Lower is better

Question 7

Payables (creditor) payment period

Answer 7

Payables (creditors) / purchases x 365 days

Shows efficiency in paying outstanding debts. Higher may be better as it offers interest free credit

Question 8

Inventory (stock) turnover period

Answer 8

Inventory or stock / cost of sales x 365 days

Shows the average number of days that stock is held before its sold. Lower is better as stock is being turned over to meet demand

Question 9

Current ratio

Answer 9

Current assets/current liabilities

This is a liquidity ratio showing how much cash or assets that can be sold fairly quickly to meet liabilities. Approximately 2 (or sometimes 1.5) is prudent

Question 10

Quick ratio

Answer 10

(Current assets - inventory) / current liabilities

Shows how much cash or cash equivalents a business has. Can be below 1 but this may indicate issues

Question 11

Stock turnover ratio

Answer 11

Cost of sales / average stock

Shows the number of times or how often stock turns over in a year. A higher number is better

Question 12

Debtors turnover ratio

Answer 12

Sales / debtors

Shows how often the amount of debtors are turned over each year. A higher number shows debts are being turned into cash more quickly

A debtor is someone who has not yet paid

Question 13

Creditors turnover ratio

Answer 13

Purchase / creditors

Shows how often the amount of creditors are turned over each year. A value of 12 would mean that the company pays its supplier every month (a credit period of a month)

Question 14

Gearing ratio

Answer 14

Long term borrowing / shareholder equity x 100

Shows borrowing as a percentage of shareholder equity. A lower number is better & shows the business is not relying too much on debt finance. Typically between 80% & 100%

Question 15

Return on equity (ROE)

Answer 15

Profit after tax / shareholder equity (capital) x 100

Shows an investor whether or not a company is making money for them & at what rate. The higher the number the better

Question 16

Solvency ratio

Answer 16

Net assets (total assets - total liabilities) / earned premium net of reinsurance

Shows net assets compared to premium. Generally higher is better but if rates increase (hard market) which is good the ratio will drop

Question 17

Solvency coverage ratio

Answer 17

Surplus regulatory capital / regulatory capital available

Shows capital avitiable relative to what required by regulators

Question 18

Liquidity ratio

Answer 18

Total liabilities / cash + investments

Shows liquidity of insurer. The lower the result the greater the liquidity but it shouldn’t be too low as this shows too many assets are tied up & not making money. Many investments are freely marketable and can quickly be liquidated to fund claims.

Question 19

Claims ratio

Answer 19

Claims incurred net of reinsurance / earned premiums net of reinsurance x 100

Show the claims incurred compared to premiums earned.

Question 20

Expense ratio

Answer 20

Admin expense / earned premiums net of reinsurance x 100

Compares admin cost to earned premium. Includes the cost of reinsurance, claims handling, underwriting, administration etc)

Question 21

Commission ratio

Answer 21

Acquisition costs / earned premium net of reinsurance x 100

Shows the acquisition/commission costs relative to earned premium

Question 22

Combined ratio

Answer 22

(Claims + expenses + commission) / earned premium net of reinsurance x 100

Shows overall underwriting performance. Does not show overall profitability as investment is not included. Below 100% shows good underwriting but above 110% is poor

Question 23

Outstanding claims ratio

Answer 23

Outstanding claims (net of reinsurance) / net assets (total assets - total liabilities)

Shows outstanding claims relative to assets. A lower ratio usually means more security (as long as there is no under reserving)