Ratio Analysis

what is ratio analysis

using financial ratios to measure financial performance. used for planning and control purposes

what do profitability ratios provide

info in relation to the return on investments made by the business

what are the most common profitability ratios

gross profit margin

operating profit margin

expenses ratio

return on capital employed (ROCE)

gross profit margin formula

(gross profit / sales) x100 = %

what is gross profit margin

amount of gross profit being earned for every euro of sales

operating profit margin formula

(operating profit (prof before interest and tax) / sales revenue) x100 = %

what is operating profit margin

amount of profit being earned (after all costs and expenses except interest and tax) for every euro of sales

expenses ratio formula

(expenses/sales) x100 = %

what is expenses ratio

amount of expenses incurred for every euro of sales

ROCE formula

(operating profit / capital employed) x100 = %

Capital employed = share capital + reserves + non-current liabilities

what are efficiency ratios

measure how efficiently a business is managing its resources

what are the most common efficiency ratios

average inventory turnover ratio (inventory days)

accounts receivable (debtors) collection period

accounts payable (creditors) payment period

inventory days formula

(average inventory / cost of sales) * 365

average inventory = (opening inv + closing inventory) / 2

if you can’t find average inventory use closing inventory

what is inventory days

average time to sell inventory

accounts receivable collection period formula

(accounts rec / sales) x number of days in acc period = days

what is accounts receivable collection period

how long it takes a company to collect its debts

accounts payable payment period formula

(accounts payable / purchases) x number of days in account period = days

what is accounts payable payment period

how long it takes a company to pay its debts

what does liquidity measure

the solvency (ability of business to meet its short term financial obligations) of a business

business is liquid if:

total assets exceed total liabilities

short term assets exceed short term liabilities (short term liquidity)

current ratio formula

current assets/current liabilities

current ratio results

widely accepted target is 2:1

the higher the ratio, the more liquid the business

if lower than 2:1, may not be able to meet liability

if higher that 2:1, check if they are holding too much of any of the current assets

acid test (quick) ratio formula

current assets-inventory / current liabilities

results of quick ratio

widely accepted target is 1:1

if lower than 1:1, may not be able to meet liabilities

if higher that 1:1, check they are not holding to much cash or have a large accounts receivable balance

what are gearing ratios

measure relationship between contribution of finance made by owners of bus and the contribution made by others in forms of loans

long term loans ratio formula

(long term loans/capital employed+long term loans) x100 =%

what does long term loans ratio measure

contribution of long term lenders to the long term capital structure of the business

what are the two most common investor ratios

earnings per share

dividend per share

earnings per share formula

net prof after tax / number of shares issued

what is earnings per share

indicates to shareholders how much return they can make on investment

dividend per share formula

dividend paid / number of shares issued

what is dividend per share

amount of profits distributed to shareholders