# Ratios Flashcards

What are the 3 profitability ratios?

Return on capital employed (ROCE)

Net profit margin

Gross margin

What is the formula for return on capital employed?

(Profit for the year i.e. net profit / capital employed) x 100/1

What are the two ways that capital employed can be calculated?

Owner’s capital + Non-current liabilities

OR

Non-current assets + Net current assets i.e. current assets - current liabilities

What is the formula for the net profit margin?

(Net Profit / Sales) x 100/1

What does the net profit margin indicate?

How well a business controls its expenses.

How can the net profit margin be improved?

Increasing the gross margin

Controlling expenses

Increasing incomes

What are the 2 liquidity ratios?

Current ratio

Acid test / Quick ratio

What is the formula for current ratio?

current assets : current liabilities

Between what values should the current ratio be?

Between 1.5:1 and 2:1

What can a business that is short of working capital encounter?

Cannot meet liabilities when due

Experience difficulties obtaining further credit

Cannot take advantage of cash discounts

How can the current ratio be improved?

Introduce further capital

Obtain long term loans

Sell surplus non-current assets

Increase profit

Reduce drawings

What is the formula for the acid test / quick ratio?

(current assets - inventory) : current liabilities

Between what values should the acid test / quick ratio be?

Between 0.5:1 and 1:1

What does the acid test / quick ratio indicate?

Can the business settle its debt without selling the inventory

What is the formula for the rate of inventory turnover?

For days, it is:

Cost of sales / Average inventory (1/2 x (opening inv. + closing inv.))

For times, it is:

(Average inventory / Cost of sales) x 365/1