Ratios

Ratios

1. Operating Profit Margins

   • A measure of a business' profitability by looking at the relationship between the operating profit (Gross profit-Expenses) and sales revenue.
   • Calculated as operating profit/sales revenue x 100
   • If the profit margin is low or falling this may indicate that a business is not managing its expenses effectively

2. ROCE

   • Measures how efficiently a business is using capital employed to generate profits
   • Capital employed=total equity+non current liabilities
   • Rate of Capital employed

3. Current Ratio

   • A measure of a business' short term survival
   • Current assets/current liabilities

4. Acid Test

   • Inventory is not included in current assets as it is deemed the hardest to turn into cash quickly
   • Liquid assets=recievables+cash and cash equivalents

5. Gearing

   • A measure of the debt to equity ratio within a business
   • Measures what proportion of a business' capital is funded through long term loans

6. Gross profit margin

   • A measure of the business' profitability by looking at the relationship between gross profit and sales revenue
   • Calculated as gross profit/sales revenue x 100
   • If the gross profit margin is low or falling this may indicate that a business is not managing its cost of sales effectively

7. Activity Ratios

   • A measure of how the internal management are utilising and controlling the business' financial assets
   • Measures how frequently a business turns over its inventory in a year
   • Average inventory held can be calculated by finding the average of inventory at the start and end of the year
   • You therefore also need the previous year's statement of financial position
   • Alternatively you can just divide cost of sales by inventory

8. Trade Recievables collection period

   • A measure of how long it takes on average for customers to pay the business for goods or services it has purchased on credit
   • Recievables/Revenue x 365

9. Trade payables payment period

   • A measure of how long it takes the business to pay for supplies it has purchased on credit
   • Payables/cost of sales x 365

10. Asset Turnover

    • Measures how efficiently the assets are being utilised to generate revenue
    • Revenue/Net Assets