Unit 3 - Ratios

Question 1

How is Gross Profit calculated?

Answer 1

Sales - Cost of Goods Sold = Gross Profit

Question 2

What is COGS?

Answer 2

Cost of Good Sold

Question 3

How is COGS calculated for a trading organisation?

Answer 3

Inventory at Year Start
+ Product Bought During Year
- Residual Inventory at Year End
= COGS

Question 4

How is COGS calculated for a manufacturing organisation?

Answer 4

Year Start Raw Material
+ Raw Material bought during year - Year End Raw Material
+ Year Start Work-in-Progress - Year End Work-in-Progress
+ Year Start Finished Goods - Year End Finished Goods.
= COGS

Question 5

What does EBIT stand for?

Answer 5

Earnings Before Interest and Tax

Question 6

What is another term for EBIT

Answer 6

Net Operating Income

Question 7

How is EBIT calculated?

Answer 7

Gross Profit 
- Marketing Expenses 
- Administration Expenses 
- Depreciation 
- Other Operating Costs
= EBIT

Question 8

How is Profit before taxes from continuing operations calculated?

Answer 8

EBIT
- Results from investments in other companies
- Bank Loan interest
= Profit before taxes from continuing operations

Question 9

How is Profit for financial year calculated?

Answer 9

Profit before taxes from continuing operations
-Tax payable
- Net income from discontinued operations
= Profit for financial year

Question 10

What is Return On Sales?

Answer 10

EBIT as a percentage of sales

Question 11

How is Return On Sales calculated?

Answer 11

ROS (in %) = (EBIT/Sales) * 100

Question 12

What does the Asset Utilisation Ration show?

Answer 12

Revenues generated as a proportion of total assets used to generate said revenues

Question 13

How is AUR calculated?

Answer 13

sales/capital employed

Question 14

How is Capital Employed calculated?

Answer 14

Shareholders funds + long-term debt

Question 15

What is ROCE

Answer 15

Return on Capital Employed.

Question 16

What is ROS

Answer 16

Return on Sales

Question 17

How is ROCE calculated?

Answer 17

ROCE (in %) = (EBIT/Capital Employed) * 100
or
ROCE (in %) = (EBIT/Sales) * (Sales/Capital Employed) * 100

Which is
ROCE = ROS * AUR

Question 18

Is AUR an effectiveness or efficiency ratio?

Answer 18

Efficiency

Question 19

Is ROCE an effectiveness or efficiency ratio?

Answer 19

Both

Question 20

Is ROIS an effectiveness or efficiency ratio?

Answer 20

Effectiveness

Question 21

What is an ORPI?

Answer 21

Output-Related Performance Index

Question 22

What type of orgnanisation might use an ORPI?

Answer 22

NFP/Service Sector

Question 23

What does the Current Ratio show?

Answer 23

Level of current assets relative to current liabilities.

Question 24

How is Current Ration calculated?

Answer 24

Current Ratio = current assets / current liabilities.

Question 25

What does the Quick Ratio show?

Answer 25

Level of current assets relative to current liabilities. ignoring inventory in current assets

Question 26

How is the Quick Ratio calculated?

Answer 26

Quick Ratio = (current assets - inventory) / current liabilities.

Question 27

What is Working Capital?

Answer 27

margin of safety between current assets and current liabilities

Question 28

How is Working Capital calculated?

Answer 28

Working Capital = current assets - current liabilities

Question 29

What does Leverage show?

Answer 29

Relative dependence on debt and equity

Question 30

How is Leverage calculated?

Answer 30

Leverage = (short-term debt + long-term debt) / shareholders' funds

Question 31

What does Gearing show?

Answer 31

European version of debt/ equity ratio

Question 32

How is Gearing calculated?

Answer 32

((short-term debt + long-term debt) /(short-term debt + long-term debt + shareholders' funds)) * 100

Question 33

What is Creditor Days?

Answer 33

How long it takes an org. to pay its creditors

Question 34

How is Creditor Days calculated?

Answer 34

Creditor Days = (Creditors / COGS) * 365 days

Question 35

What is Stock or Inventory Days

Answer 35

How long stock/inventory takes to become output product/service

Question 36

How is Stock (or Inventory) Days calculated?

Answer 36

Stock Days = (Stock / COGS) * 365 days

Question 37

What is Debtor Days?

Answer 37

How long it takes an org to get paid.

Question 38

How is Debtor Days calculated?

Answer 38

(Debtors / Sales) * 365 days

Question 39

What is ROE?

Answer 39

Return On Equity

Question 40

What does ROE show?

Answer 40

Net profit for the year as a proportion of shareholders' funds - shows the organisation's performance taking equity into account.

Question 41

How is ROE calculated?

Answer 41

ROE (in %) = (Net Profit for Financial Year / Shareholders' Funds) * 100

Question 42

What does the Payout Ratio show?

Answer 42

Percentage of after-tax profits paid to shareholders as dividends

Question 43

How is Payout Ratio calculated?

Answer 43

Payout Ratio (in %) = (Dividends / Profit for Financial Year) * 100

Question 44

What does Interest Cover show?

Answer 44

Interest Cover shows whether an organisation is producing enough operating profit to cover its interest payments.

Question 45

How is Interest Cover calculated?

Answer 45

Interest Cover = EBIT / Interest Expense

Question 46

What is the P/E Ratio?

Answer 46

Profit/Earnings Ratio. Shows the market price as a proportion of earnings per share.

Question 47

How is P/E calculated?

Answer 47

P/E Ratio = Market Price / Earnings Per Share