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# Ratios

## by Peter Sammons on Jul 02, 2010

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## RatiosPresentation Transcript

• Basic Ratios
• Current Ratio
Helps a business work out their Solvency. Allows a business to see how well they are able to meet their liabilities.
Shows how many assets the business has compared to liabilities (1.5-2 is considered good practice)
Current assets
Current ratio =
Current liabilities
• Acid Test Ratio
Like the current ratio, but removes stock, to work out how a business would meet its liabilities without the sale of stock.
Again a positive figure should be higher than 1 but not higher than 2.
Current assets - stock
Acid test ratio =
Current liabilities
• Gross Profit Percentage
Shows gross profit as a percentage of turnover. Sometimes called gross profit margin, and shows how well the business is managing purchase of stock.
A high gross profit percentage shows that the business is doing well and controlling costs
Gross Profit
Gross Profit % =
Turnover
• Net Profit Percentage
Takes the profit calculation one step further by removing all other costs.
This shows profit before tax, if Gross profit is high yet Net low then it shows that the business operating costs are too high.
Net Profit
Net Profit % =
Turnover
• Return on Capital Employed (ROCE)
Final calculation that a business might use for profitability. Worked out by considering the net profit as a percentage of the capital employed by that business.
This means they can compare the percentage received against what they would have received if they put the money in a bank.
Net profit before interest and tax
ROCE % =
Capital employed (incl. Shareholders)
• Stock Turnover
Shows how many times over the business has sold the value of its stocks during the year.
The higher the stock turnover the better, because money is then tied up for less time in stocks.
Cost of Goods Sold
Stock Turnover Ratio =
Stock
• Asset Turnover
Shows the percentage of total assets that the business owns
By dividing the sales by the total assets, the business is able to work out how many pounds it earns for every pound invested in assets.
Sales
Asset Turnover =
Total Assets
• Debtorâ€™s Collection
Shows the link between the number of debtors and how long on average it takes the business to collect its debts.
The fewer the number of days means the business has better credit control, because it collects what it is owed more quickly.
X 365
Debtorsâ€¦.
Total number of days it takes debtors to pay =
Credit sales