financial ratio analyisis

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)

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

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’

PAYABLES DAYS = Trade payables ÷ Cost of sales x 365

RECEIVABLES DAYS = Trade receivables ÷ Sales revenue x 365

INVENTORY TURNOVER = Cost of sales ÷ Average inventory