Learning Aim F - Ratios

Learning Aim F - Ratios

1. Gross profit margin

   • Looks at gross profit as a percentage of sales turnover. If GP falls it is thought to be too low.
     • Gross Profit/revenue x 100

2. Mark-Up

   • Looks at profit as a percentage of cost of sales.
     • Gross profit/cost of sales x 100

3. Net profit margin

   • Looks at net profit as a percentage of sales turnover
     • Net profit/revenue x 100

4. Return on capital employed

   • Shows the percentage return a business is achieving from the money being used to generate the return
     • Net profit before interest & tax/capital employed x 100

5. Current Ratio

   • Shows amount of current assets in relation to current liabilities
     • Current assets/current liabilities

6. Liquid capital ratio

   • A tougher measure of a firms liquidity, however doesn't include inventory
     • Current assets - inventory/current liabilities

7. Trade receivable days

   • Measures how long it takes for debtors to pay as a number of days
     • (trade receivables/credit sales) x 365

8. Trade payable days

   • Measures how long it takes for a business to pay for goods and services
     • (trade payables/credit purchases) x 365

9. Inventory Turnover

   • Measures the amount of time an item of stock is held by the business
     • (average inventory/cost of sales) x 365
       • Average inventory = opening + closing inventory / 2

10. Limitations of Ratios

    • Calculated on past data so not a true reflection of current performance
      • Do not consider qualitative factors
        • Ratio can indicate a problem in the business