Accounting Ratios - created from Mind Map

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Profitability/Perfromance Ratios

Relation b/w Ratios :

net profit margin X asset turnover = ROCE

Position/Liquidity Ratios

Long Term Financial Position

Investor Ratios

Gross Profit Margin: Gross Profit / Sales revenue %

Gross Profit = sales - COS

~ margin Co. achieves on Sales

Operating Profit Margin: profit from Operations / sales revenue %

Return on Cap Emp : % Profit / Capital Employed

Net Asset Turnover: (times) Sales revenue / Cap Emp

Net Profit Margin : Profit from op. / Sales revenue %

Return On equity : PAT / Equity %

Working Capital Ratios

Inventory Turnover Period : Inventory / COS X 365 days

~alternative - COS / Inventory =

____ times.

~ checks if required amt. is invested in Stock or not.

Receivables Collection Period: Trade receivables / Credit sales X 365days

~ If sales not given use revenue.

~credit period given by Co. to its customers.

Payables Payment period: Trade payables / Credit purchase X 365 days

~ if purchases not given COS.

~ Credit period taken by Co. from suppliers.

Current Ratio : Current assets / Current Liabilities

~Measures Ability to pay Short term Financial Obligations.

~ 1.5:1 ideal

Quick Ratio: CA - Inventory / CL

~ also known as liquid or acid test ratio.

~ checks if Co. has enough liquid resources to settle its Liabilities.

Gearing

~Indicates high degree of risk

~ Indicates sensitivity of Earnings and dividends to changes in profitability and activity levels.

~ High and low Gearing.

~use gearing successfully -

(a)Stable Profits

(b) suitable assets for security.

Overtrading

~Arises when Co. expands without expanding capital base, hence they rely on overdraft and payables.

Interest Cover : PBIT / Interest Payable

~Ability to pay Interest out of the profits generated.

Debt / Equity : Loans+Pref.Sh.capital / ordinary Sh.cap+reserves+NCI

EPS : earning / share

Price/Earning Ratio : current sh.price / latest EPS

~ aka Stock market ratio/ earnings multiple.

~Represents market view of future prospects of share.

Dividend Yield : Dividend per share / current sh.price

Dividend Cover : PAT / Dividends