Financial Knowledge and Skills for Business: Week 7

  • Created by: EvemChas
  • Created on: 30-01-23 11:37

Ratios: Part 1

The Key Aspects of Financial Health: Financial Ratios

  • Profitability
  • Efficiency 
  • Liquidity
  • Financial Gearing
  • Investment

Ratios: Using data from Financial Accounts

  • Statement of Financial Position
  • Statement of Cash Flows
  • Income Statement

Ratio Benchmarks: Ratios may be compared with:

  • Past periods
  • Similar businesses for the same period
  • Planned performance
1 of 4

Ratios: Part 2

Profitbaility Ratios

  • Return on Ordinary Shareholders' Funds (ROSF) = Profit for the year (less any preference dividend)/Ordinary share capital + Reserves x100
  • Return on Capital Employed (ROCE) = Operating profit/Share capital + Reserves + Non-current liabilties x100
  • Operating Profit Margin = Operating profit/Sales revenue x100
  • Gross Profit Margin = Gross profit/Sales revenue x100

Efficiency Ratios

  • Average Inventories' Turnover Period = Average inventories held/Cost of sales x365
  • Average Settlement Period for Receivables = Average trade receivables/Credit sales revenue x365
  • Average Settlement Period for Payables = Average trade payables/Credit purchases x365
  • Sales Revenue to Capital Employed Ratio = Sales revenue/Share capital + Reserves + Non-current liabilities 
  • Sales Revenue per Employee = Sales revenue/Number of employees
2 of 4

Ratios: Part 3

Liquidity Ratios

  • Current Ratio = Current assets/Current liabilities
  • Acid Test Ratio = Current assets (exlcluding inventories)/Current liabilities 

Gearing Ratios

  • Gearing Ratio = Long-term (non-current) liabilities/Sjhare capital + Reserves + Long-term (non-current) liabilities x100
  • Interest Cover Ratio = Operating profit/Interest payable

Limitations of Ratio Analysis

  • Quality of Financial Statements
  • Inflation
  • The restricted view given by ratios
  • The basis for comparison
  • Statement of Financial Position Ratios
3 of 4

Ratios: Part 4

Investment Ratios

  • Dividend Payout Ratio = Dividends announced for the year/Earnings for the year available for dividends x100
  • Dividend Cover Ratio = Earnings for the year available for dividend/Dividends announced for the year
  • Dividend Yield Ratio = Dividend per share/Market value per share x100
  • Earnings per Share = Earnings available to ordinary shareholders/Number of ordinary shares in issue
  • Price/Earnings Ratio (P/E) = Market value per share/Earnings per share
4 of 4


No comments have yet been made

Similar Business Management resources:

See all Business Management resources »See all Financial Knowledge and Skills for Business resources »