Financial Ratios
used to obtain a quick indication of a businesses financial performance
uses figures from soci and sofp
used to see how u r doing now and to compare between years and competitors
Measuring Profitability
profitability ratios asses a busineses ability to generate profit
gross profit margin
a high percentage means u have good sales in comparison to the cost of making them
gross profit = sales - cost of goods sold (opening inventory + purchases - closing inventory)
gross profit margin = (gross profit / revenue) x 100
(if ur gross profit margin is 35% every £1 of sales means u are making 35p gross profit)
sales - cost of goods sold = gross profit
gross profit - expenses = net profit
this info is in the SoCI
helps decide whether to increase prices , decrease cost of goods sold or increase sales
net profit margin
how ur operating costds effect profit margins
a high margin means you are profitable and have expenses under control
a love margins means u need to cut back
net profit margin = (net profit / revenue) x 100
mark up
profit as a percentage of cost of goods sold it shows what percentage of cost pf goods sold is added to reach the selling price
mark up = gross profit / cost of sales x 100
return on capital employed
shows the percentage return the business is getting from the caoital being used to generate them
ROCE = net profit 4 intrest and tax / capital employed x 100
mostly used by investors
the higher the better usualy 20% or more
Measuring Liquidity
current ratio
shows amount of current assets in relation to current liabilities
expressed as x:1
for example if the current ratio is 2:1 for every £2 a business has in assets they have £1 in current liabilities
this is good ratio as u have plenty to assets to cover liabilities
current ratios = current assets / current liabilities
liquid capital ratio / acid test
together and better method of measuring liquidity
is curretn ratio but with out inventory bc inventory is the most difficult current assets to turn into cash quickly
liquid capital ratio = current assets - inventory / current liabilities
Measuring Efficiency
how effectivly money is used in a business assessing how well managment r controling stock and finances
trade receivable days
tells us on average how long it takes debtors to pay
can effect cash flow
expressed in days
if there’s no credit sales use overall sales
trade receivables / credit sales x 365
trade payable days
shows how long it takes in the business to pay their invoices to creditors (eg suppliers)
trade payables / credit purchases x 365
inventory turn over
refers to how quickly stock sells / how long its kept before its sold
average inventory / cost of sales x 365
(average inventory = opening + closing inventory / 2 )
limitations to ratios
calculated on past data and may no accuratly reflect the business performance
may be based on manipulated data causing innaccuracies
dont consider qualitive factors
they identify problems not cause
differnce in accounting methods make comparing firms difficult