Financial Ratios

What are Financial Ratios?

  • Definition: Calculated values that provide insights into a business's financial health by analyzing relationships between different financial statement items.

Profitability Ratios

2⃣ What is the Gross Profit Margin?

  • Formula:
    Gross Profit Margin (%) = (Gross Profit ÷ Revenue) × 100

  • Indicates: The percentage of revenue that exceeds the cost of goods sold (COGS).

3⃣ What is the Net Profit Margin?

  • Formula:
    Net Profit Margin (%) = (Net Profit ÷ Revenue) × 100

  • Indicates: The percentage of revenue remaining after all expenses, taxes, and interest are deducted.

4⃣ What is Return on Capital Employed (ROCE)?

  • Formula:
    ROCE (%) = (Operating Profit ÷ Capital Employed) × 100

    • Capital Employed = Total Equity + Non-current Liabilities

  • Indicates: How efficiently a company uses its capital to generate profit.

Liquidity Ratios

5⃣ What is the Current Ratio?

  • Formula:
    Current Ratio = Current Assets ÷ Current Liabilities

  • Ideal Range: Between 1.5 and 2.

  • Indicates: The company's ability to cover short-term debts with its short-term assets.

6⃣ What is the Acid Test Ratio (Quick Ratio)?

  • Formula:
    Acid Test Ratio = (Current Assets - Inventory) ÷ Current Liabilities

  • Ideal Range: Around 1:1.

  • Indicates: The ability to meet short-term liabilities without relying on the sale of inventory.

Efficiency Ratios

7⃣ What is Inventory Turnover?

  • Formula:
    Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

  • Indicates: How many times inventory is sold and replaced over a period.

8⃣ What is Receivables Turnover (Debtor Days)?

  • Formula:
    Receivables Turnover (days) = (Trade Receivables ÷ Revenue) × 365

  • Indicates: The average number of days it takes for a company to collect payment after a sale.

9⃣ What is Payables Turnover (Creditor Days)?

  • Formula:
    Payables Turnover (days) = (Trade Payables ÷ Cost of Sales) × 365

  • Indicates: The average number of days a company takes to pay its suppliers.

Gearing Ratios

🔟 What is the Gearing Ratio?

  • Formula:
    Gearing (%) = (Non-current Liabilities ÷ Capital Employed) × 100

  • Indicates: The proportion of a company’s capital that is financed through debt.

  • High Gearing (>50%) → High risk, more debt than equity.

  • Low Gearing (<50%) → Lower risk, more equity than debt.

Investment Ratios

1⃣1⃣ What is the Dividend Yield?

  • Formula:
    Dividend Yield (%) = (Dividend per Share ÷ Market Price per Share) × 100

  • Indicates: The return on investment for shareholders from dividends.

1⃣2⃣ What is the Earnings Per Share (EPS)?

  • Formula:
    EPS = Net Profit ÷ Number of Ordinary Shares

  • Indicates: The portion of a company’s profit allocated to each outstanding share of stock.

1⃣3⃣ What is the Price-to-Earnings (P/E) Ratio?

  • Formula:
    P/E Ratio = Market Price per Share ÷ Earnings per Share

  • Indicates: How much investors are willing to pay for each dollar of earnings.

1⃣4⃣ What is the Dividend Cover Ratio?

  • Formula:
    Dividend Cover = Profit for the Year ÷ Annual Dividend

  • Indicates: The number of times a company can pay its dividend out of net income.