Finance Ratios

Finance Ratios

1. Types

   • Gross Profit Percentage
     • (gross profit/net sales) x 100
     • measures profit from buying and selling
     • improved by:
       • increase selling price
       • find cheaper supplier
       • negotiate deal with current supplier
       • increase supervision to reduce theft or breakages of stock
   • Mark-up ratio
     • (gross profit/ cost of goods sold) x 100
     • measures how much has been added to the cost of goods as profit
     • improved by:
       • negotiate deal with current supplier
       • find cheaper supplier
       • raise selling price of their peoducts
   • Net Profit Percentage
     • (net profit/ net sales) x 100
     • profit after expenses paid
     • improved by:
       • improve their gross profit percantage
       • identify any expenses that can be reduced
   • Return On Capital Employed (ROCE)
     • (net profit/ opening capital) x 100
     • return on capital invested in the business by the owner/shareholder
     • owner/shareholder should compare different ROCE to see which one offers the best profit
   • Current Ratio/ Working Capital Ratio
     • current assets/ current liabilities (CA/CL)
     • shows ability to pay short term debts
     • 2:1 acceptable
     • improved by increasing its current assets or decrease current liabilities
     • too high?
       • funds could be better employed in the business to generate income rather than sitting in the bank
   • Acid Test Ratio
     • (current assets - stock) / current liabilities
     • 1:1 acceptable
     • ability to pay its short-term debts in an emergency
     • stock is removed as cannot guarantee that stock will be sold quick