Audit Risk Assesment Ratios

Return on capital employed

Formula: Profit before interest and tax / (Equity + net debt) | Purpose: Effective use of resources

Return on shareholders' funds

Formula: Net profit for the period / (Share capital + reserves) | Purpose: Effective use of resources

Gross profit percentage

Formula: (Gross profit x 100) / Revenue | Purpose: Assess profitability before taking overheads into account

Cost of sales percentage

Formula: (Cost of sales x 100) / Revenue | Purpose: Assess relationship of costs to revenue

Operating cost percentage

Formula: (Operating costs / overheads x 100) / Revenue | Purpose: Assess relationship of costs to revenue

Net margin/operating margin

Formula: (Profit before interest and tax x 100) / Revenue | Purpose: Assess profitability after taking overheads into account

Current ratio

Formula: Current assets : Current liabilities | Purpose: Assess ability to pay current liabilities from current assets

Quick ratio

Formula: (Receivables + Current Investments + cash) : liabilities | Purpose: Assess ability to pay current liabilities from reasonably liquid assets

Gearing ratio

Formula: Net debt / Equity | Purpose: Assess reliance on external finance

Interest cover

Formula: Profit before interest payable / Interest payable | Purpose: Assess ability to pay interest charges

Net asset turnover

Formula: Revenue / Capital employed | Purpose: Assess revenue generated from asset base

Inventory turnover

Formula: Cost of sales / Inventories | Purpose: Assess level of inventory held

Inventory days

Formula: (Average inventory x 365) / Cost of sales | Purpose: Assess the average inventory-holding period

Trade receivables collection period

Formula: (Trade receivables x 365) / Revenue | Purpose: Assess ability to turn receivables into cash

Trade payables payment period

Formula: (Trade payables x 365) / Credit purchases | Purpose: Assess ability to pay suppliers