Ratio Analysis

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Current Ratio
Current Assets / Current Liabilities
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Net Current Assets
Current Assets - Current Liabilities
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Acid Test
(Current Assets - Stock) / Current Liabilities
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Gross Profit Margin
(Gross Profit / Turnover) x 100
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Net (Operating) Profit Margin
(Net Profit / Turnover) x 100
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Capital Employed
Total Equity + Non Current Liabilities
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Return on Capital Employed
(Operating Profit / Capital Employed) x 100
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Return on Equity
(Profit for Year / Shareholders Equity) x 100
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Asset Turnover
Revenue / Non Current Assets
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Inventory (Stock) Turnover
Cost of Sales / Average Stock Held
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Cost of Sales
Opening Stock + Purchases - Closing Stock
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Average Stock Held
(Opening Stock + Closing Stock) / 2
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Creditor (Trade Payables) Days
(Payables x 365) / Cost of Sales
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Debtor (Trade Receivables) Days
(Receivables x 365) / Revenue
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Gearing
(Non Current Liabilities / Capital Employed) x 100
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Debt to Equity
(Non Current Liabilities / Equity) x 100
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Interest Cover
(Operating Profit / Interest Payable) x 100
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What are the liquidity ratios?
Current Ratio & Acid Test
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What are the profitability ratios?
Gross Profit Margin, Net Profit Margin, Return on Capital Employed (ROCE) & Return on Equity (ROE)
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What are the efficiency ratios?
Asset Turnover, Inventory Turnover, Creditor Days & Debtor Days
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What are the risk ratios?
Gearing, Debt to Equity & Interest Cover
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What is current ratio and what is the ideal figure?
Show whether a firm can pay its bills as they fall due. Looking for a value in excess of 1.5:1 Liquidity can be improved by selling stock, speeding up collection of debtors and slowing down payments to creditors
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What is acid test and what is the ideal figure?
Due to stock being hard to covert into cash its a more accurate test of liquidity. 1:1
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What is gross profit and what is the ideal figure?
The profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. The larger the better. Can be improved by increasing price or reducing cost.
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What is net profit margin and what is the ideal figure?
The percentage of revenue left after all expenses have been deducted from sales
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What is ROCE and what is an ideal figure?
Around 20 - 30%.
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What is ROE and what is the ideal figure?
Measures how much profit is generated for each £1 of shareholders’ funds invested
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What is asset turnover?
Shows how much revenue is generated for every £1 of non-current assets – shows how hard the assets are being worked, and indicates capacity utilisation. Looking for it to improve, but will vary according to industry (e.g. engineering - low asset turn
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What is inventory turnover?
Shows how many times a firm sells all its stock each year. Will vary according to industry. Firms need enough stock, but not too much as waste of resources
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What is creditor days?
Shows how many days on average it takes a firm to pay its creditors. Looking for it to align with average credit period given, lengthening periods may indicate cash flow problems
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What is debtor days?
Shows how many days on average it takes for firm to collect money. Should align to creditor period provided (e.g. food retailers – virtually none. Increasing ratio may indicate credit control issues or offering longer terms to attract customers
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What is gearing?
Show where a business gets its capital from – the proportion from long term loans as opposed to retained profit and share capital. A gearing above 50% means company is highly geared, below 50% shows it is low-geared.
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What is debt to equity?
Compares the long-term liabilities with share capital and retained profits
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What is interest cover?
Measures how many times a business can pay its interest charges with the operating profit it makes – so helps to decide if a company can afford to borrow (more) Generally an interest cover for 4 times is judged to be sufficient.
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Other cards in this set

Card 2

Front

Net Current Assets

Back

Current Assets - Current Liabilities

Card 3

Front

Acid Test

Back

Preview of the front of card 3

Card 4

Front

Gross Profit Margin

Back

Preview of the front of card 4

Card 5

Front

Net (Operating) Profit Margin

Back

Preview of the front of card 5
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