Ratios

Gross Profit Percentage Ratio

The percentage of profit made from buying and selling goods before deducting other expenses. Formula:(Gross Profit/Sales Revenue) × 100. Example:(50,000/150,000) × 100 = 33.3%. Ways to improve GPP:Increase selling price, decrease cost of sales, find cheaper suppliers or negotiate trade discounts.

Profit for the Year Ratio

The percentage of overall (net) profit made after deducting all expenses. Formula:(Profit for the Year/Sales Revenue) × 100. Example:(30,000/150,000) × 100 = 20%. Ways to improve NPP:Increase gross profit, increase sales, reduce expenses.

Return on Equity Employed

Calculates the return an investor will get back after a period of time. Formula:(Profit for the Year/Opening Equity) × 100. Example:(30,000/120,000) × 100 = 25%. Ways to improve ROE:Increase sales or reduce cost of sales, reduce expenses.

Current Ratio

Measures the organization's ability to pay short-term debts. Formula:Current assets divided by current liabilities. Example:100,000 / 50,000 = 2:1. A higher ratio indicates efficiency, while a lower ratio may mean inability to pay debts. Ways to improve current ratio:Increase current assets, sell non-current assets, decrease current liabilities.

Acid Test Ratio

Measures the organization's ability to pay short-term debts, excluding inventory. Formula:(Current assets - closing inventory) divided by current liabilities. Example:(100,000 - 30,000) / 50,000 = 1.4:1. A 1:1 ratio is considered healthy. Ways to improve acid test ratio:Increase non-inventory current assets, reduce inventory levels, sell non-current assets, decrease current liabilities.

Rate of Stock Turnover

Measures how quickly a firm goes through its inventory. Formula:Cost of Sales divided by average inventory. A high turnover indicates good sales and effective production and marketing. A low turnover may indicate poor product quality, ineffective marketing, poor customer service, or negative reputation.

Advantages of Ratio Analysis

Forecasting and planning, budgeting, communication, inter-firm comparison, indication of liquidity position, indication of overall profitability, aid to decision-making.

Limitations of Ratio Analysis

Historical information, quantitative analysis only, does not account for external factors, limited use for comparison.