| Interest Cover = | (Profit before interest and tax) ÷ Interest charge |
| Return on Capital Employed (ROCE) = | (Profit before interest and tax) ÷ Total long term capital |
| What is the most important ratio? | The ROCE ratio |
| Net Profit Margin = | (Profit before interest and tax) ÷ Revenue |
| Asset Turnover Ratio = | Revenue ÷ Long term capital |
| Gross Profit margin = | Gross profit ÷ Revenue |
| Return on equity = | (Profit after tax and preference dividends) ÷ equity shareholders funds |
| What are the Profitability ratios? | - ROCE
- Net Profit Margin
- Asset Turnover Ratio
- Gross Profit Margin
- Return on Equity |
| What are the Liquidity ratios? | - Current Ratio
- Quick Ratio (Acid Test) |
| What are the Gearing ratios? | - Gearing
- Leverage
- interest cover |
| Current Ratio = | Current Assets ÷ Current Liabilities |
| Quick Ratio = | (Current Assets - Inventory) ÷ Current Liabilities |
| Inventory Days = | (Inventory ÷ Cost of sales) x 365 |
| Average Collection Period or Receivable Days = | (Trade Receivables ÷ Purchases) x 365 days |
| Average Payment Period or Payables Days = | (Trade Payables ÷ Purchases) x 365 days |
| Gearing = | (Total long-term debt) ÷ (Shareholders' equity + Longterm debt) |
| Leverage = | (Shareholders' equity) ÷ (Shareholders' equity + Total Longterm debt) |
| Interest Cover = | (Profit before interest and tax) ÷ Interest charge |
| What does gearing look at? | How the company has raised its money. |
| What are the efficiency ratios? | - Inventory days
- Average Collection period (Receivables Days)
- Average Payment Period (Payables Days)
- Working Capital Cycle (Cash Cycle) |
| Working Capital Cycle or Cash Cycle = | Inventory days + Receivable days - Payable days |
| What does the Current Ratio do? | It measures how well current assets meet the short-term liabilities. |
| What is another name for the Current Ratio? | Working Capital |
| What is Liquidity? | The ability to meet debt obligations |
| What can cause increases in the Current Ratio? | Increases of high levels of inventory and/or high levels of cash. |
| What does the Quick Ratio do? | It measures whether there is enough cash, short-term investments and receivables to cover the short-term liabilities. |
| What is a standard current ratio? | 1.5:1 and above |
| What is a standard quick ratio ? | 0.7:1 to 1:1 |
| What is the major difference between the current ratio and the quick ratio? | The quick ratio does not include inventory in the assets. This gives a better idea of the entity's position in the situation where inventory is slow moving (such as high value goods). |
| What does Inventory Days do? | It measures how efficiently management uses its inventory to produce and sell goods. |
| Inventory Turnover = | (Cost of sale ÷ Inventory) = times pa |
| What are some actions that can cause the inventory days to increase? | Purchasing in bulk, keeping extra stock for emergencies and to help stop 'stock out' and preparing for an anticipated increase in orders. |
| What does Average Collection Period do? | It measures how long it takes on average to receive cash from *credit* sales. |
| What does Average Payment Days do? | It measures the credit period taken by the entity from its suppliers. |
| How is the Average Payment Days Ratio assessed? | It is always compared to previous years. |
| What does Gearing look at? | The way a business is structured and financed. |
| What is Interest Cover? | The ability of a business to pay interest out of the profits. |
| What Interest Cover would be satisfactory? | It must be above 2. |
| What is the Checklist used when assessing a company using the ratios? | 1) What does the ratio mean?
2) What does a change in the ratio mean?
3) What it the norm?
4) What are the limitations of the ratio |
| Asset Turnover Ratio = | (Revenue excluding discounts) ÷ Capital Employed |
| Capital Employed = | Share Capital + Reserves + Non-current Liabilities |
