Podcast
Questions and Answers
How is the average receivables calculated?
How is the average receivables calculated?
What does the creditor settlement period refer to?
What does the creditor settlement period refer to?
What key ratio indicates how many times a business can cover its interest repayments?
What key ratio indicates how many times a business can cover its interest repayments?
Which formula would you use to calculate the working capital ratio?
Which formula would you use to calculate the working capital ratio?
Signup and view all the answers
What do liquidity ratios primarily assess?
What do liquidity ratios primarily assess?
Signup and view all the answers
What does the Return on Shareholders Capital Employed measure?
What does the Return on Shareholders Capital Employed measure?
Signup and view all the answers
Which of the following formulas represents the Net Profit Margin?
Which of the following formulas represents the Net Profit Margin?
Signup and view all the answers
What does the Gross Profit Margin indicate?
What does the Gross Profit Margin indicate?
Signup and view all the answers
What is included in the calculation of Return on Total Capital Employed?
What is included in the calculation of Return on Total Capital Employed?
Signup and view all the answers
Which financial ratio is calculated as Inventory usage / holding period?
Which financial ratio is calculated as Inventory usage / holding period?
Signup and view all the answers
What does the Receivables/Debtors Settlement Period measure?
What does the Receivables/Debtors Settlement Period measure?
Signup and view all the answers
In the context of profitability ratios, what do expense ratios assess?
In the context of profitability ratios, what do expense ratios assess?
Signup and view all the answers
Which of the following represents the formula for calculating gross profit?
Which of the following represents the formula for calculating gross profit?
Signup and view all the answers
Study Notes
Profitability Ratios
-
Return on Shareholders' Capital Employed (ROSCE): Measures return generated based on shareholder investment. Calculated as (Net profit before interest & tax * 100) / Total Shareholders' Funds (exclude revaluation reserve).
-
Return on Total Capital Employed (ROCE): Measures return generated using all funding sources (debt and equity). Calculated as (Net profit before interest & tax * 100) / Total Capital Employed (long-term funds + equity + borrowings/debt).
-
Gross Profit Margin: Return based on cost of sales. Calculated as (Gross Profit * 100) / Revenue.
-
Net Profit Margin: Return after deducting all indirect costs. Calculated as (Net profit before interest & tax * 100) / Revenue.
Expense Ratios
-
Selling and Distribution Costs Ratio: Percentage of revenue spent on selling and distribution. Calculated as (Selling and distribution costs * 100) / Revenue.
-
Administrative Expenses Ratio: Percentage of revenue spent on administration. Calculated as (Administrative expenses * 100) / Revenue.
Operating Ratios
-
Inventory Usage/Holding Period: Measures the time inventory remains in stock. Calculated as (Closing Inventory * 365) / Cost of Sales. Alternatively, calculate as (Average Inventory*365)/Cost of Sales using average inventory calculated as (Opening Inventory + Closing Inventory)/2.
-
Receivables/Debtors Settlement Period: Measures the time it takes to collect on credit sales. Calculated as (Closing Receivables * 365) / Revenue; alternatively use average receivables [(Opening Receivables + Closing Receivables)/2].
-
Payables/Creditors Settlement Period: Measures the time it takes to pay suppliers. Calculated as (Closing Payables * 365) / ((Purchases + Closing Payables - Opening Payables)/2).
Liquidity Ratios
-
Working Capital Ratio: Measures short-term liquidity. Calculated as Current Assets / Current Liabilities. Expresses the ratio as x:1.
-
Acid Test Ratio: Measures quick liquidity (excludes inventory). Calculated as (Liquid Assets / Current Liabilities) and is expressed as x:1
Gearing/Leverage Ratios
- Gearing Ratio: Measures percentage of funding from debt to long-term debt and equity. Calculated as (Long-term liabilities * 100) / Total Capital Employed.
Other Ratios
- Interest Cover: Indicates how many times earnings can cover interest payments. Calculated as Profit Before Interest & Tax / Interest Payable.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge on key profitability and expense ratios used in financial analysis. This quiz covers essential ratios such as ROSCE, ROCE, gross profit margin, and net profit margin. Understand how these metrics help in assessing a company's financial health and operational efficiency.
