Ratios

Ratios

1. Ratios can be used to asses the following aspects of a business

   • profitablity, financial efficency,Liquidity, Shareholders ratios, Gearing

2. Types of ratios:

   • profitibility ratios
     • gross profit margin
       • gross profit margin=gross profit/turnover(sales)x100
         • Although the higher the margin, the better, the reuslt must be compared to the industry average.
           • different markets operate with very different margins.
     • net/operating profit margin
       • Net operating profit margin=net profit/turnoverx100
         • This measures effiecieny of managing expenses. The higher the percentage the better.
           • The net profit margin should also be compared with the gross profit margin. If the gross profit margin has improved but the net profit margin has declined, then profits on trading are improving.
     • Return on capital employed
       • ROCE=operating profit/total equity + non-current liabilities
         • This measures the efficiency of funds invested into the business at generating profits.
   • Financial effieciny ratios
     • Asset turnover= Sales revenue/ net assets.
       • This measures how efficiently an organisation uses its resources
     • Inventory turnover= cost of goods sold/average stock held
       • This calculates the amount of times inventories are sold and replaced. It can only really be interpreted with knowledge of the industry.
         • Higher rate of stock turnover is better.
     • Debtors collection period (days)= debtors/sales revenue x 365
       • This shows how long on average it takes a company to collect debts
     • creditors collection period (days)= creditors/sales revenue x 365
       • This is desighned to show on average how many days it takes a company to pay its suppliers

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