Ratio analysis 2

Ratio 2

Efficiency: 

Overhead to Sales: 

Overhead (expenses) / Sales x 100 = %

Measures the amount of expenses in relation to sales 

For every 1pound of sales how much is an expense 

If the % is increasing: 

1) the business is being less efficient and is paying more for its expenses - needs to control its costs

If the % is decreasing: 

1) the business is being more efficient than it was- it has controlled its costs effectively.

Rate of stock turnover:

Cost of sales / Average stock = _ times  

Measures the amount of times stock is being turned over in a year. 

if the amount is increasing: (positive)

1) shows that the business is selling more stock 

2) Could be due to the fact that the business is holding onto less average stock

If the amount is decreasing: (negative)

1) The business is selling less stock 

2) The business is holding onto more average stock possibly leading to higher costs in storage.

further analysis: if the business is selling more stock, the reason it is selling more should also be considered. Maybe it was due to a sale which wouldn't have had a huge impact on the gross profit so wouldn't be very efficient. 

Liquidity:  

Net current assets: 

Current assets : Current liabilities = _: 1

Measures the amount of money/ asset the business has to pay its short term debts.

Acid test or Liquid capital ratio: 

Liquid assets : Current liabilities = _: 1

Measures the…