RATIOS MOB

Ratio Analysis

A method of analyzing financial statements using percentages and ratios to make comparisons over time and with other businesses.

Profitability Ratios

Ratios that measure how well a business is performing in terms of profit, turnover, sales, and capital employed.

Liquidity Ratios

Ratios that indicate a company's ability to pay its debts and reflect its short-term strength or solvency.

Investors' Ratios

Ratios that measure the returns on capital invested by shareholders or other investors and show the relationship of shares to profits, dividends, and assets.

Efficiency Ratios

Ratios that measure how efficiently resources are utilized and determine the efficiency of the firm in collecting debts.

Financial Ratios

Ratios that assess the financial structure of a business, including the proportion of financing obtained from debt capital.

What do Efficiency ratios measure and determine in a firm?

Efficiency ratios measure how efficiently resources are utilized and determine the efficiency of the firm in collecting its debts.

Return on Capital Employed (ROCE

This ratio shows the amount of money that has been made on the capital that was employed over the period. This is sometimes referred to as the ‘primary efficiency ratio’ because of its importance.

Net profit / Capital employed × 100

or

Net profit / Average capital× 100

what can the rate for capital employed tell the investors?

Rate for Capital Employed: The rate for capital employed can indicate the efficiency of a company in generating profits from its capital investments, providing insights to investors on the company's profitability and return on investment.

what is the aim from the ROCE rate of Capital employed or primary efficiency ratio?

The aim of investors is to have sufficient or high returns and so they will refrain from investing if the firm is falling below expectations. The ROCE should be above the rate at which the company borrows money.

Gross profit percentage

It shows the percentage of the firm’s sales that goes to gross profit. The higher the ratio, the more desirable it is.

gross profit / sales *100

what is the aim for gross profit percentage and how can the form increase it?

firms would want to push that figure closer to 50 per cent. Higher gross profit suggests that management has been able to use the available resources to generate high profits.

to increase this:

Increasing sales revenue – this could be done by either selling more or increasing prices

Buying material in bulk in order to benefit from discounts

Sourcing a cheaper supplier without sacrificing the quality of the materials

Reducing the cost associated with the production of the goods.

Net profit Margin

net profit/ sales *100

It shows net profit expressed as a percentage of sales or turnover. It gives a good idea of how the firm controls its expenses or overheads – that is, whether or not its overheads are too high and are depleting the gross profit earned.

Mark-up

Gross profit/ cost of sales × 100

the percentage that is added to the f irm’s cost of sales in order to arrive at the selling price of its product. The ratio will therefore be susceptible to changes in costs.

Current Asst Ratio (Liquidity)

Current assets/ current liabilities

The current ratio assesses whether the firm’s current assets (if liquidated) can cover its short-term obligations or current liabilities. It compares the firm’s current assets with its current liabilities:

*Sell unproductive assets to get cash

*Reduce the time to collect from debtors

*Lessen Drawings

EPS Earnings per share(investment ratio)

net profit with added tax and interest- preference dividend

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Number of ordinary shares issued

Shows the investors how much profit they will receive from their investment.

Expressed in dollars

The higher the EPS, the more attractive it is for investors who may want to make an investment.

P/R - Price earning ratio

market price per share

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EPS (earnings per share)

unit is ‘‘times’’

A high P/E such as 12.1times shows that there is a growth in demand for shares

dividend yield

gross dividend per share (total dividends aid/ # of ordinary shares issued)

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market price per share

*low dividend yield suggests the potential and steady growth of the business

*high- suggest quick profits

What the investor wants is up to him/ her

*Shows

This can also be used to compare one investment option with others.

What is important to note when using dividend yield ratios?

Its not the only thing that will affect the investor’s decision, the price of the share when it was purchased and what it is now. If the price is higher now, then the investor could sell these shares to earn additional rewards.