Ratios Flashcards
In a profit and loss account, how do you calculate gross profit
Total revenue - cost of stock sold
In a profit and loss account, what is the net profit (true profit)
Gross profit - expenses
What is the importance of a profit and less account
Can tell if the selling price is too low
Can tell if the suppliers pricing is too expensive for the business
How see if expenses have increased
What are fixed assets
Valuable items th e business has owned for over a year for example machinery
What are current assets
Short term assets, had to less than a year for example cash and closing stock
What are current liabilities
Short term debts that have to be repaid within a year for example a bank overdraft
What is working capital
Cash left over that can be used to pay bills as they fall due, calculated by current assets - current liabilities
What is capital employed
Amount of money invested in business, either debt or equity.
How do you find total net assets
Fixed assets + working capital
Importance of balance sheet
Enough colateral to apply for aloan
See when current liabilities greater than current assets
See how company is financed , high equity good for interest and applying for loans
What are the 6 ratios
3 profitability: gross profit margin, net profit margin and return on investment
2 liquidity: acid test and current ratio
Gearing: debt/equity
What does gross profit margin mean
Percentage of sales a business keeps after deducting cost of sales
How do you calculate gross profit margin
Gross profit/ sales x 100
How would you imporve gross profit margin
Increase sales (eg marketing strategy), reduce direct costs
Who would be interested in net and gross profit margin?
Investors - dividends
Employees - job security
Managers - bonus’
What is net profit margin
Percentage of sales a business keeps after deducting ALL expenses (eg rent and wages)
How would you calculate net profit margin
Net profit/ sales X 100
How would yo improve net profit margin and return on investment
Increases sales (eg new marketing strategy), reduce direct and indirect expenses, make pay cuts
What is return on investment
Percentage of net profit from long term capital employed
How do you calculate ROI
Net profit/ capital employed X 100
Whois interested in ROI
Investors = are returns worthwhile compared to investing money in bank (higher risk)
Competitors
Employees with shars
What is the current ratios
Compares current assets with current liabilities
How do you work out current ratio
Current assets: current liabilities
How would you imporve current ratio
Ideally 2:1
better credit control
Budget better to increase cash reserves
