Ratios

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Ratios

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

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