Profitability Ratios:
Operating Profit
↑ Return on capital employed (ROCE)
¿ × 100
Share Capital+ Reserves+ NonCurrent liabilities
Profit before preference dividends
↑ Return on shareholders’ funds (ROE)
¿ ×100
Share Capital+ Reserves
Gross Profit
↑ Gross Profit Margin
¿ ×100
Sales Revenue
Operating Profit
↑ Operating Profit margin
¿ ×100
Sales Revenue
Profit
Rate of return on investment
¿
Invested Capital
Efficiency Ratios:
Average Inventories held
↓ Average inventory holding period
¿ ×365
Cost of sales
Cost of sales
↑ Or Inventory turnover
¿
Inventory held
Average trade receivables
↓ Average settlement period for trade receivables
¿ ×365
Credit Sales Revenue
Credit sales revenue
↑ Or Trade receivables turnover
¿
Trade receivabes
Average trade payables
↑ Average settlement period for trade payables
¿ ×365
Credit purchases
Credit purchases
↓ Or Trade payables turnover
¿
Trade payables
Sales
↑ Asset turnover ratio
¿
Share Capital+ Reserves+ Non Current liabilities
Sales
↑ Sales revenue per employee
¿
Number of employees
, Average Average Average
inventory
holding
period
+ settlement
period for
receivables
- payment
period for
payables
=Operating
cash cycle
Operating Asset
profit
margin x turnover
ratio = ROCE
Liquidity ratios: Use financial ratios to assess liquidity and solvency
Current assets
↑ Current ratio
¿
Current liabilities
Current assets−Inventory
↑ Acid test ratio
¿
Current liabilities
Operating cash flows
↑ Cash ratio
¿
Current liabilities
Financial gearing occurs when a business is financed
externally. To finance growth and exploit tax
advantages (interest is tax deductible). Dangers of high
financial gearing: Less control over financing decisions.
Limited flexibility due to loan agreement restrictions.
Risk of bankruptcy.
Non−current liabilities
Gearing ratio/Debt to capital
¿
Share capital+ reserves+ longterm liabilities
Operating profit
↑ Interest cover ratio
¿
Interest payable
Investment Ratios:
Dividend announced for the year
↑ Dividend pay-out ratio
¿ ×100
Profit before preference dividend
Dividend per share /1−Dividend tax rate
↑ Dividend yield ratio
¿ ×100
Market value per share
Operating Profit
↑ Return on capital employed (ROCE)
¿ × 100
Share Capital+ Reserves+ NonCurrent liabilities
Profit before preference dividends
↑ Return on shareholders’ funds (ROE)
¿ ×100
Share Capital+ Reserves
Gross Profit
↑ Gross Profit Margin
¿ ×100
Sales Revenue
Operating Profit
↑ Operating Profit margin
¿ ×100
Sales Revenue
Profit
Rate of return on investment
¿
Invested Capital
Efficiency Ratios:
Average Inventories held
↓ Average inventory holding period
¿ ×365
Cost of sales
Cost of sales
↑ Or Inventory turnover
¿
Inventory held
Average trade receivables
↓ Average settlement period for trade receivables
¿ ×365
Credit Sales Revenue
Credit sales revenue
↑ Or Trade receivables turnover
¿
Trade receivabes
Average trade payables
↑ Average settlement period for trade payables
¿ ×365
Credit purchases
Credit purchases
↓ Or Trade payables turnover
¿
Trade payables
Sales
↑ Asset turnover ratio
¿
Share Capital+ Reserves+ Non Current liabilities
Sales
↑ Sales revenue per employee
¿
Number of employees
, Average Average Average
inventory
holding
period
+ settlement
period for
receivables
- payment
period for
payables
=Operating
cash cycle
Operating Asset
profit
margin x turnover
ratio = ROCE
Liquidity ratios: Use financial ratios to assess liquidity and solvency
Current assets
↑ Current ratio
¿
Current liabilities
Current assets−Inventory
↑ Acid test ratio
¿
Current liabilities
Operating cash flows
↑ Cash ratio
¿
Current liabilities
Financial gearing occurs when a business is financed
externally. To finance growth and exploit tax
advantages (interest is tax deductible). Dangers of high
financial gearing: Less control over financing decisions.
Limited flexibility due to loan agreement restrictions.
Risk of bankruptcy.
Non−current liabilities
Gearing ratio/Debt to capital
¿
Share capital+ reserves+ longterm liabilities
Operating profit
↑ Interest cover ratio
¿
Interest payable
Investment Ratios:
Dividend announced for the year
↑ Dividend pay-out ratio
¿ ×100
Profit before preference dividend
Dividend per share /1−Dividend tax rate
↑ Dividend yield ratio
¿ ×100
Market value per share
