Ratios

Ratios

1. Profitablitity

   • Measures of how profitable the organisation is. These are ratios used to analyse the organisations expenses, cost of stock and the selling price
     • Gross profit percentage
       • Gross profit/sales x 100 = __%
       • Increase in ratio from one year to the next
         • Selling price has been raised
         • Cost of sales has been lower because cheaper suppliers have been used
         • Increase in marketing activities has caused demand to increase
         • Better quality product being sold compared to a competitor and this has increased sales
       • Decrease in ratio from one year to the next
         • Cost of sales has increased - cheaper supplier should be located
         • Stock might have been lost due to wastage or theft
         • Fewer marketing activities might have caused demand to decrease
         • Fewer sales due to a better product being sold by a competitor
     • Net profit percentage
       • Net profit/sales x 100 = __%
       • Increase in ratio from one year to the next
         • Gross profit has been higher
         • Expenses have been lower - possibly because cheaper alternative have been sourced
       • Decrease in ratio from one year to the next
         • Gross profit has gone down
         • Expenses have increased - the organisation should source cheaper alternatives
     • Return of capital employed (ROCE)
       • Net profit/capital employed x 100 = __%
       • Increase in ratio from one year to the next (higher return)
         • Sales have increased - due to reasons given for the Gross Profit Percentage ratio
         • Expenses have been lower
       • Decrease in ratio from one year to the next
         • Sales have decreased - due to reasons given for the gross profit percentage ratio
         • Expenses have been higher

2. Liquidity

   • Measures of how able the organisatio is to pay its short term debts. These ratios would indicate if an organisation needed to arrange additional finance to pay its bills
     • Current Ratio
       • Current assets/current liabilities :1
         • Ideal ratio = 2:1
       • Increase in ratio from one year to the next
         • Current liabilities have decreased eg fewer creditors
         • Current assets have increased eg more stock or more money in the bank
       • Decrease in ratio from one year to the next
         • Current liabilities have increased eg more creditors
         • Current assets have decreased eg less stock or less money in the bank
     • Acid test ratio
       • Current assets/current liabilities : 1
         • Ideal ratio = 1:1
       • Increase in ratio from one year to the next
         • Current liabilities have decreased eg fewer creditors
         • Current assets have increased eg more stock or more money in the bank
       • Decrease in ratio from one year to the next
         • Current liabilities have increased eg more creditors
         • Current assets have decreased eg less stock or less money in the bank

3. Efficiency

   • Measures of how well the capital invested into the company is being utilised and if the organisation is performing as efficiently as it can.
     • Stock turnover ratio
       • Cost of sales/average stock = 'times'
         • Average stock = closing stock +opening stock/2
       • Increase in ratio from one year to the next
         • Increase in the cost of goods sold eg purchases
         • Decrease in average stock holding
       • Decrease in ratio from one year to the next
         • Decrease in the cost of goods sold eg purchases
         • Increase in average stock holding

4. Problems with ratios

   • The figures used to calculate the ratio are historic and do not show what could happen in the future
   • Comparisons between different organisations are difficult
   • External factors are not considered