Financial Knowledge and Skills for Business: Week 7

The Key Aspects of Financial Health: Financial Ratios

• Profitability
• Efficiency 
• Liquidity
• Financial Gearing
• Investment

Ratios: Using data from Financial Accounts

• Statement of Financial Position
• Statement of Cash Flows
• Income Statement

Ratio Benchmarks: Ratios may be compared with:

• Past periods
• Similar businesses for the same period
• Planned performance

Profitbaility Ratios

• Return on Ordinary Shareholders' Funds (ROSF) = Profit for the year (less any preference dividend)/Ordinary share capital + Reserves x100
• Return on Capital Employed (ROCE) = Operating profit/Share capital + Reserves + Non-current liabilties x100
• Operating Profit Margin = Operating profit/Sales revenue x100
• Gross Profit Margin = Gross profit/Sales revenue x100

Efficiency Ratios

• Average Inventories' Turnover Period = Average inventories held/Cost of sales x365
• Average Settlement Period for Receivables = Average trade receivables/Credit sales revenue x365
• Average Settlement Period for Payables = Average trade payables/Credit purchases x365
• Sales Revenue to Capital Employed Ratio = Sales revenue/Share capital + Reserves + Non-current liabilities 
• Sales Revenue per Employee = Sales revenue/Number of employees

Liquidity Ratios

• Current Ratio = Current assets/Current liabilities
• Acid Test Ratio = Current assets (exlcluding inventories)/Current liabilities 

Gearing Ratios

• Gearing Ratio = Long-term (non-current) liabilities/Sjhare capital + Reserves + Long-term (non-current) liabilities x100
• Interest Cover Ratio = Operating profit/Interest payable

Limitations of Ratio Analysis

• Quality of Financial Statements
• Inflation
• The restricted view given by ratios
• The basis for comparison
• Statement of Financial Position Ratios

Investment Ratios

• Dividend Payout Ratio = Dividends announced for the year/Earnings for the year available for dividends x100
• Dividend Cover Ratio = Earnings for the year available for dividend/Dividends announced for the year
• Dividend Yield Ratio = Dividend per share/Market value per share x100
• Earnings per Share = Earnings available to ordinary shareholders/Number of ordinary shares in issue
• Price/Earnings Ratio (P/E) = Market value per share/Earnings per share