Ratio Analysis - created from Mind Map

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Financial Statements

Values published are absolute figures

Difficult to compare different sized businesses

Need to compare

Info from a ratio on its own is v.limited

Past Periods

Similar businesses

Objectives/targets

Types of Ratio

Profitability

Liquidity

Efficiency

Debt

Investors

Gross Profit Percentage

Gross Profit/Revenue X 100

Relationship between revenue and direct costs

% of each £ left after the business has paid for its materials, labour etc

The higher the better

Important to competitiors

Cash

Comes from: investors putting in capital, receipts from sales, sales of non-current assets, banks agreeing to loans and overdrafts

critical balance between inflows and outflows

Big profit doesn't necessarily mean the business is doing well

liquidity

e.g.overtrading

working capital=current assets-current liabilities

Markup

Amount added to the cost of sales to give the selling price

Net profit Percentage

profit from operations/revenue X 100

Profit before finance and tax deducted

Represents pure profits earned on each £ of revenue after expenses

Return on Capital Employed(ROCE)

Rate at which the business is earning profit relative to the money invested-relates earnings to the level of investment in the business

Profit from operations/capital employed

reflects the financial risk

gives shareholders a % to compare to the interest rates

Asset turnover

revenue/capital employed X 100

link between investment + income and ultimate profit

Indicates the efficiency of the business' use of its assets to generate revenue.

great interest to management

Higher the better but too high >overtrading

Earnings per share(EPS)

profit after tax/number of ordinary shares

fundamental measure of share performance

Assesses potential-relates available profit for distribution to number of shares

less shares=more per share

Business may buy bad shares-lots of shares issued-profits diluted

trends created

Limitations

must combine with other areas

accuracy depends on reliability of data

Differing accountig policies

Ratios tell us what has happened but not why

Don't analyse aspects without numbers attached e.g. morale/goodwill

Gross Profit = Revenue-Cost of sales

This is when a business invests too much in non-current assets(often during rapid expansion) and not enough is kept for day-to-day trading and emergencies.

Good=business has lots of cash/near cash assets compared to bills

Capital employed= shareholder's funds + long term liabilities

profit after tax=all costs deducted

Ratio Analysis

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