Interpreting Published Accounts

Interpreting Published Accounts

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Profitability Ratios

Profitability Ratios

Net Profit Margin measures relationship between net profit and the level of sales made. The higher the better. Formula; Net Profit/Revenue x100.

Return on Capital Employed measures efficiency of a business to turn capital into profit. The higher the better. Formula; Operating Profit/ Equity+NCL (Total Capital Employed) x100. Typical figure may be between 20-30%.

 

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Efficiency Ratios

Financial Efficiency

Asset turnover measures a business' sales in relation to the assets used to make sales. Formula; Revenue/Net assets (Total assets-Total liabilities). Difficult to give this ratio a standard figure as it differs depending on the type of product and company.

Inventory turnover measures the number of times that a business turns over its goods for sale. Formula; Cost of goods sold/Average Inventories. This figure will change depending on the type of business. A greengrocer for example will change stock everyday and therefore expect their turnover to be between 250-300.

Receivables is how long it takes the company to collect debts owed by customers. Standard credit terms are usually 30, 60, 90, and 120 days. The shorter the answer the better for the business. Formula; Receivables/Revenue x365

 

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Liquidity Ratios

Liquidity ratios

Current ratio is the relationship between its current assets and current liabilities. A normal ratio should be 2:1. Formula; Current Assets/Current Liabilities.

Acid test ratio is liquid assets (current assets-inventories)/Current liabilities. Normal figure should be between 0.6:1 and 1.1:1.

Gearing measures the amount borrowed by a business. Anything over 50% is considered to be high. Formula; NCL/Total Equity+NCL x100.

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