Interpreting Published Acounts

HideShow resource information
Ratio Analysis means
A technique for analysing a bussiness's financial performance by comparing one piece of infomation with another
1 of 35
What can ratios be classified into
1) profitablitiy, 2) Financial efficiency, 3) liquidity and gearing, 4) Shareholders' ratios
2 of 35
Net profit margin is
a ratio that measures the relationship between the net profit and the level of turnover or sales made
3 of 35
Net profit margin calculation
net profit / revenue...X100
4 of 35
The higher the % the better. Establishes whether the firm have been efficient at controlling costs
5 of 35
Return on Capital Employed
Measures the efficiency of the business in using it's capital to generate profits
6 of 35
ROCE calculation
net profit before tax / Total capital employed,,,X100
7 of 35
The higher the figure for ROCE the better
8 of 35
To asses the ROCE figure for a firm it should be compared with
previous years figures, figures from other companies and current interest rates
9 of 35
Financial efficiency is measured using what figures
Asset turnover, Inventory turnover, recivables, payables
10 of 35
Asset turnover
Measures a bussiness's sales in relation to the assets used to generate these sales
11 of 35
Asset turnover calculation
rev. / Net assets employed
12 of 35
Incresing ratio over time =
Firm is operating with greater efficiency
13 of 35
Fall in ratio over time =
Decline in sales or increase in assets employed
14 of 35
Inventory turnover means
The no. of times per year a b.s turns over it's inventories ofgoods for sale
15 of 35
Inventory turnover calc.
Cost of goods sold / average inventories (x)
16 of 35
Inventory turnover expressed in days calc
Average inventories X365 / Cost of goods sold
17 of 35
Recivables measures
how long, on average, it takes the company to collect debts owed by customers
18 of 35
Recivables calc
Recivables X 365 / revenue (days)
19 of 35
Shows how long on average it takes a company to pay its suppliers
20 of 35
Payables calc.
Payables X 365 / cost of goods sold
21 of 35
Liquidity =
Business's assets that can easily be turned into cash
22 of 35
Current ratio - measures liquidity calculation
current assets / current liabilities (: - ratio)
23 of 35
Acid test calc
liquid assets (current assets - inventories) / current liabilities (: ratio)
24 of 35
Shows long term financial stability of business
25 of 35
What does gearing measure
Proportion of capital employed by the business that is provided by long - term lenders against proportion that has been invested by owners
26 of 35
Gearing calc
Non - current liabilities / total capital employed... X 100
27 of 35
Dividend per share
Total dividend declared by company divided by the number of shares the business has issued
28 of 35
Dividend per share calc
Total dividends / No. shares issued
29 of 35
The higher the figure the better
30 of 35
Dividend yield calc
Dividend per share / market share price... X 100
31 of 35
Drawbacks of ratio analysis...
32 of 35
1) Retrospective
concerned on past performance doesnt look to future
33 of 35
2 )Different companies may use different accounting policies
Hard to compare
34 of 35
3) No. infomation about non - financial matters
State of market or morale of workforce
35 of 35

Other cards in this set

Card 2


What can ratios be classified into


1) profitablitiy, 2) Financial efficiency, 3) liquidity and gearing, 4) Shareholders' ratios

Card 3


Net profit margin is


Preview of the front of card 3

Card 4


Net profit margin calculation


Preview of the front of card 4

Card 5




Preview of the front of card 5
View more cards


No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all Financial Planning resources »