financial ratio analyisis

  • Created by: s.tread
  • Created on: 16-10-19 12:39

PROFITABILITY

Return on capital employed = Operating profit ÷ Capital employed x 100

 

Capital Employed = Equity + Non-current liabilities

 

Equity = Share capital + Reserves

 

Non-current liabilities

= Loans repayable over more than one year (bank loans, mortgages and debentures)

 

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LIQUIDITY / SOLVENCY

LIQUIDITY / SOLVENCY means the ability of a business to pay its short-term debts.

 Current ratio = Current assets: Current liabilities

It is expressed as a ratio : 1

 Current assets = inventory, trade receivables, bank account (unless overdrawn) and cash

 Current liabilities = trade payables, bank overdraft and loans repayable within one year

 Inventory means unsold stocks of materials and/or finished goods

 Trade receivables are customers who have not yet paid for goods sold on credit

 Trade payables are suppliers who have not yet been paid for goods bought on credit

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GEARING

GEARING = Non-current liabilities ÷ Capital employed x 100

 

Non-current liabilities and Capital employed mean the same as the definitions under ‘Return on Capital Employed’

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EFFICIENCY

PAYABLES DAYS = Trade payables ÷ Cost of sales x 365

 

RECEIVABLES DAYS = Trade receivables ÷ Sales revenue x 365

 

INVENTORY TURNOVER = Cost of sales ÷ Average inventory

 

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