This document discusses various types of financial ratios used to analyze a business, including profitability ratios like gross profit margin, liquidity ratios that measure ability to meet obligations, efficiency ratios such as return on capital employed and stock turnover, gearing ratios that assess borrowing risk, and investment appraisal ratios like average rate of return. Profitability ratios examine returns after costs. Liquidity ratios measure short-term financial health. Efficiency ratios assess capital usage and inventory levels. Gearing ratios evaluate borrowing levels. Investment appraisal ratios are used to analyze project profitability over time.

1. Formulae and Ratio Analysis
Created by nit dudhrejiya.
From SY.BBA.

2. Profitability Ratios

3. Profitability Ratios
Gross Profit Margin
• Result of:
−Price structure
−Amount of business done
−How well expenses are controlled
•Return after variable cost are taken from
the sales revenue
•Can be compared to industry standards

4. Liquidity Ratios

5. Liquidity Ratios
• Ability to meet its near-term obligations, and
it is a major measure of financial health
• Liquidity= cash that is within a business/ability
to generate cash quickly
• The higher value the ratio is, the larger the
margin of safety the business has to pay off
debts

6. Liquidity Ratios
• Creditors are the people interested in the ratio
because it shows if you can pay off your
business
• If you're looking to secure money via the sale
of some stock through an initial public
offering, many State Securities Bureaus will
require that you have a current ratio of 2:1 or
better.

7. Efficiency Ratios

8. Efficiency Ratios
Return on Capital Employed (ROCE)
• The “primary ratio”
• Tells how effective the business is at returning
a profit from the capital it has
• Can compare small businesses to big
businesses
• Shareholders – compare ROCE with other
investments
– Should be higher for more risk as a good
investment

9. Efficiency Ratios
Stock Turnover
• Low ratio = poor sales and therefore excessive
inventory
• High ratio = strong sales or effective buying.

10. Efficiency Ratios
Stock Turnover (Number of Days)
• Calculates the days it takes to sell the stock
and how many days’ worth of stock is held by
the business

11. Gearing Ratio

12. Gearing Ratio
 Looks at the promotion of capital employed
that comes from long-term loans.
 Companies borrow money
 Expand
 New machinery and equipment
 More capital = more interest pay
 Borrowing is a risk
 Assess how big that risk is
 Measures proportion of company's total
capital borrowed

13. Investment Appraisal

14. Investment Appraisal
Average Rate of Return (ARR)
• Used in investment appraisal
• Measures profitability/accounting of a project
of its life
• Considers all data, not just cash flows up the
point of payback