IB business Ratios

Profitability ratios

measures an entities profitability and efficency

gross profit

shows control over direct costs

Profit margin

Shows control over both direct & indirect costs

Return of capital employment (ROCE)

The measures how efficiently a business uses it capital capital employment to generate profits

Improve profitability ratios

improve sale revenue, sell broader range of products, run ads to sell more

cut costs

find cheaper supplies, reduce marketing expenses

Liquidity ratios

measure ability to pay short term debts

Current ratio

benchmark 1.5:1, too low-risk of liquidity problems, too high-unproductive use of current assets

Acid ratio

Benchmark 1:1

increase liquid current assets-shorten credit period, promote cash use, keep less buffer stock

Decrease liabilities-use excess cash to pay off short term loans, avoid overdrafts, rely on longer term loans

Stock turnover (days)

lower is better

stock turnover (times)

higher is better

Improvement strategies stock turnover

reduce stock levels and old inventory, avoid excess stock to avoid liquidity issues, sell most popular products

debtor days

measures how long it takes to collect payments

interpretation

shorter is better-debts are collected faster

encourage costumer to pay with cash, lighten credit period

creditor days ratio

longer better-gives more time to repay suppliers

negotiate longer credit periods, find suppliers offering better credit terms

Gearing ratio

measures how much a firm is financed by a loan capital

Gearing ratio benchmark

>50% higher means more reliance on loans, leaves the firm more exposed to interest rate fluctuations

improvement strategies gearing ratio

Pay off loan terms with extra cash, increase equity financing through share capital or retained profit

creditor days

measure how long a firm take to pay creditors based on trade credit

bankruptcy vs insolvency

Insolvency is a financial state where you cannot pay your debts on time.

Bankruptcy is the legal process used to deal with that insolvency through a court.