week 22 Flashcards
(50 cards)
what are the measures of financial performance
gross profit margin
operating profit margin
net profit margin
why do we use ratios
financial statements provide information for users to evaluate financial performance and position of the company but are hard to compare
standardise information by accounting for size differences - allow comparability
what is cross-sectional analysis
compare different companies at the same time
what is time series analysis
same company over time
what are the four categories for ratios
measures of performance
measures of working capital
measures of solvency and liquidity
measures of return on investment and risk
what is measures of performance
measures of how the company is performing financially
what are measures of working capital
indicates the ability of the company to manage elements of working capital effectively
what are measures of liquidity and solvency
indicates the ability of the company to pay its liabilities as they fall due
what are measures of return on investment and risk
indicates the ability of the company to generate returns for its shareholders
what do performance ratio tell us
how efficiently a company is generating profit
contribution of income and expenses to financial profitability
performance of an entity regardless of how it is financed
give examples of performance ratios
gross profit margin
operating profit
net profit margin
return on capital employed
decomposition of ROCE
return on total assets
what do margins tell you
profit levels as a proportion of revenue
how do you calculate gross profit margin
(sales - cost of sales) / sales x 100
indicates a price premium a company commands for its products/services
how do you calculate operating profit margin
operating profit / sales x 100
indicates how efficiently a company can generate profit through its core operations
how do you calculate net profit margin
net profit / sales x 100
indicates how efficiently a company is able to generate profit, considering financing and tax expenses
how do you calculate return on capital employed
ROCE = operating profit / net capital employed x 100
or
operating profit margin x asset turnover ratio
indication of how effectively and efficiently a company has utilised its assets
how do you calculate net capital employed
equity capital + debt capital
or
total assets - current liabilities
how do you calculate asset turnover ratio
sales / (total assets - current liabilities)
measures a companies ability to generate sales from its assets
measures of level activity and productivity
different ratios in different industries due to different tech
how do you calculate return on total assets
operating profit / total assets x 100
does not take into account how assets are financed
how do you calculate average ROA over a year
average total assets = (total assets at year end + total assets at previous year end) / 2
ROA = operating profit / average total assets x 100
what is working capital
amount of capital required for daily operations
why should you manage working capital
reduces need for short term financing
reduces pressure on cash
how do you calculate net current assets
net current assets = current assets - current liabilities
what are the three components of working capital
trade recievables
inventories
trade payables
