Flashcards
Accounting ratios
Flashcards do conjunto (17)
- 1Profitability Return on capital employed Profit from operations Total equity + Non current liabilities X 100% = x%Expresses the profit of a company in relation to the capital employed to generate it. The percentage return is best thought of in relation to other investments, eg a bank interest rate.
- 2Profitability Return on total assets Profit from operations Total assets X 100% = x%Return on total assets looks at the overall return on the assets of a company. Expenditure on assets is expenditure on resources that should generate future growth. This ratio explores whether or not the investment is generating profits.
- 3Profitability Return on equity Profit after tax Total equity X 100% = x%The return for the ordinary shareholders
- 4Profitability Gross profit percentage Gross profit Revenue X 100% = x%Should be similar from year to year for the same company. A significant change requires further investigations into buying and selling prices. Inventory valuations need to be correct as they affect gross profit.
- 5Profitability Expense/revenue percentage Specified expense Revenue X 100% = x%Useful when exploring how an expense has been affected by growth in sales or for comparing the cost control of two different companies.
- 6Profitability Operating profit percentage Profit from operations Revenue X 100% = x%Is profit before finance costs and tax. This avoids distortion when comparisons are made between two different companies where one is heavily financed by means of loans, and the other is financed entirely by ordinary share capital.
- 7Liquidity Current ratio Current assets Current liabilities = X:1Measures the relationship between current assets and current liabilities. A company should not operate at a level that is too low, as it will not have sufficient assets to cover its debts as they fall due. However, too high may suggest they have too much inventory, receivables or cash.
- 8Liquidity Quick ratio or 'acid test' ratio Current assets - inventory current liabilities = X:1Measures the immediate solvency of a business by showing the extent to which its current liabilities are covered by cash and receivables. A ratio of less than 1:1 could mean the company would have difficulty paying its debts as they fall due.
- 9Financial position Interest cover Profit from operations Finance costs = X timesConsiders the amount of times a company could pay its interest payments using its profit from operations.
- 10Finance position Gearing Non-current liabilities Total equity + Non-current liabilities = X timesIs concerned with the long term financial stability of the company. It looks at how much the company is financed by debt. The higher the gearing ratio, the less secure the financing and future of the company.
- 11Use of resources Inventory turnover Cost of sales Inventories = X timesThis will show on average how many times a company is able to sell its total inventory in a year. A company should strive to keep its inventory turnover high.
- 12Use of resources Inventory holding period Inventories Cost of sales X 365 daysIs the number of days inventory is held. a greengrocer will have low inventory holding days as the goods will perish where as a wine merchant will have longer inventory holding days as the goods last longer. A company should aim to keep its inventory days as low as possible.
- 13Use of resources Trade receivables collection period Trade receivables Revenue X 365 daysThis shows on average how long it takes for trade debtors to settle their accounts with the company. Over time collections times should reduce.
- 14Use of resources Trade payables payment period Trade payables cost of sales X 365 daysThis shows how long it takes for us to settle our trade payable balances.
Trade payables provides the company with a valuable source of short term finance, but payment shouldn't be delayed for too long as suppliers may stop sending goods. - 15Use of resources Working capital cycle Inventory days + Receivables days - payable daysIs the period of time from the point at which cash goes out of a business to pay for inventories and the point at which cash comes back into the business as sales revenue.
- 16Use of resources Asset turnover (total assets) Revenue Total assets = X timesThis measures the efficiency of the use of total assets in generating revenue. It is a measure of the number of pounds of revenue generated per pound of total assets invested in the company.
Generally the ratio should be increasing. - 17Use of resources Asset turnover (net assets) Revenue Total assets - current liabilities = X timesThis measures the efficiency of the use of net assets in generating revenue. It is a measure of the number of pounds of revenue generated per pound of net assets invested in the company.
Generally the ratio should be increasing.
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- Descrição
- FlashCards sobre Accounting ratios, criado por Claire Holmes em 08-10-2016.
- Criado por
- Claire Holmes
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