Ratios

Question 1

Gross profit margin

Answer 1

Gross profit/sales revenue x 100

Question 2

Operating profit margin

Answer 2

Operating profit/sales revenue x 100

Question 3

Net profit margin

Answer 3

Net profit/sales revenue x 100

Question 4

Return on assets ROA

Answer 4

Net profit/total assets

x 100

Question 5

Total Asset Turnover

Answer 5

Sales revenue/total assets

£

Question 6

What does total asset turnover do?

Answer 6

Tells you how efficient you are at generating revenue from your total assets

Question 7

What does Return on Assets show?

Answer 7

How effective company is at using assets in generating profit

What percentage of every £ invested will be as profit

Question 8

4 Profitability ratios

Answer 8

Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return-on-Assets

Question 9

5 Efficiency (Asset Management) Ratios

Answer 9

Total Asset Turnover
Non-current Asset Turnover
Inventory Turnover Period
Day Sales in Account Receivables
Days Sales in Accounts Payable

Question 10

Inventory turnover period

Answer 10

Inventories/cost of sales x 365

Question 11

What does Inventory turnover period show?

Answer 11

Measures number of days inventory stays in the system

Lower the better

Question 12

Non-Current Asset turnover

Answer 12

Sales revenue/non-current assets

£

Question 13

What does Non-Current Asset turnover show?

Answer 13

How many £s of sales are produced by each £ of non-current assets

Question 14

Trade Receivable Settlement Period

Answer 14

Trade receivables/ sales revenue x 365

Question 15

What does Trade Receivable Settlement Period show?

Answer 15

How fast customers pay their bills

Try to keep to minimum

Question 16

Trade Payable Settlement Period

Answer 16

Trade payables/cost of sales x 365

Question 17

What does Trade Payable Settlement Period show? (days payable outstanding)

Answer 17

Average no. of days takes company to pay its own invoices

Question 18

2 Liquidity Ratios

Answer 18

Current Ratio

Acid Test Ratio

Question 19

Ideal current ratio

Answer 19

2:1

Question 20

Current Ratio

Answer 20

Current assets/current liabilities

Question 21

Current Ratio shows

Answer 21

Ability to pay back obligations in short term

Higher is is better liquidity position

Has to be positive

Question 22

Acid test ratio

Answer 22

Current assets-inventories/Current liabilities

Question 23

Ideal acid test ratio

Answer 23

1:1

Question 24

Acid test ratio represents

Answer 24

more strict test of liquidity

Question 25

3 Leverage Ratios

Answer 25

Total debt to equity ratio
Long term debt to total assets
Interest coverage ratio

Question 26

What does leverage mean?

Answer 26

Extent to which a company’s asset base is financed by debt rather than owners equity

Question 27

Debt to equity ratio

Answer 27

Total liabilities/owners equity

Question 28

Debt to equity ratio shows

Answer 28

how much debt the company has for every £ of shareholder equity

Question 29

Long term debt to total assets

Answer 29

Long term (non current) liabilities/ total assets

Question 30

Interest coverage ratio

Answer 30

Operating profit/interest payable

Question 31

Interest coverage ratio measures

Answer 31

Amount of operating profit available to cover interest payable

Measures how much interest it has to pay every year relative to how much its making

Too close to 1 is bad

Question 32

What is profitability?

Answer 32

Measure of the company’s ability to generate sales and to control its expenses

Question 33

What do efficiency ratios do?

Answer 33

Consider how effectively and productively the resource of the organisation are being used to create revenue and profit

Question 34

What are liquidity ratios for?

Answer 34

Concerned with ability of the business to meet short term financial obligations