HSC Business Studies- Financial Ratios

What is the gross profit formula?

Gross profit= sales- COGS

What is the COGS formula?

COGS= Opening stock + Purchases - Closing stock

What is the net profit formula?

Net profit= Gross profit- Expenses

What is the balance sheet formula?

A= L + OE

Assets = Liabilities + Owner's Equity

The current ratio also known as?

- working capital ratio

- Liquidity ratio (short-term)

What is the current ratio?

=Current assets ÷ Current liabilities

Gearing is also know as?

- Solvency (long-term)

- Leverage

What is the debt to equity ratio? AKA Gearing ratio

Total liabilities ÷ Owner's equity

How do you calculate sales?

Sales= Quantity x Price

What are the ratios for the profitability financial objective?

1. Gross profit ratio

2. Net profit ratio

3. Return on equity ratio

What is the Gross profit ratio?

= Gross profit ÷ Sales

x by 100 and express as percentage

How do you calculate the Net profit ratio?

= Net profit ÷ Sales

x by 100 and express as percentage

What is the Return on equity ratio?

= Net profit ÷ Total equity

x by 100 and express as percentage

What are ratios associated with the financial objective of efficiency?

- Expense ratio

- Accounts receivable turnover ratio

How do you calculate the expense ratio?

= Total expenses ÷ Sales

x by 100 and express as percentage

How do you calculate working capital

= current assets - current liabilities

What are the ratios for the liquidity financial objective?

- current ratio

- working capital ratio

How do you calculate Accounts receivable turnover ratio

= Sales ÷ Accounts receivable

Example of a Current Asset

Accounts Receivable

Example of a Current Liability

Accounts Payable

How do you calculate total liabilities

= Current liabilities + Non-current liabilities

Where do you locate total equity?

Balance Sheet

Where do you locate total expenses?

Revenue Statement

What is the industry average for Liquidity

2:1

What is the ideal ratio for Solvency

1:1

How do you calculate Liabilities on a Balance Sheet

Assets - Owners Equity

How do you calculate Owners Equity on a Balance Sheet

Assets - Liabilities

What does a Gross Profit Ratio of 0.85: 1 indicate

It means 85 cents out of every dollar of sales stays in the business and 15 cents in every dollar goes to suppliers to pay for goods later resold.

What does a Net Profit Ratio of 0.29:1 indicate

It means for every $1 of sales, 29 cents stays in the business after the costs of paying suppliers have been met, and all other expenses paid.