1 / 13

Chapter 10 Introduction to Ratio Analysis

Chapter 10 Introduction to Ratio Analysis. Introduction .

dominic
Télécharger la présentation

Chapter 10 Introduction to Ratio Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 10Introduction to Ratio Analysis

  2. Introduction A major purpose of accounting is to provide useful information to make informed decisions. One way to assist with this is to examine financial ratios. A financial ratio matches two or more pieces of monetary data and presents them in the form of a percentage, proportion, or in relation to a period of time (e.g. per month, per quarter, per year).

  3. Profitability Ratios These measure the firm’s potential to obtain and maintain revenues that exceed expenses. Examples include: • Gross mark-up • Gross margin • Net profit margin • Return on capital employed

  4. Liquidity Ratios These measure the firm’s ability to meet its short term debts as they arise. Examples include: • Current ratio • Acid-Test ratio • Debtors’ turnover • Creditors’ turnover • Rate of stockturn

  5. Stock Turnover (Turnover) Ratio Cost of sales ÷ Average stock, where Average stock= (Opening stock + Closing stock) ÷ 2 Measures the speed at which merchandise is sold. It may be shown in “times” or “days”.

  6. Current (Working Capital) Ratio Current assets ÷ Current liabilities A test of the ability to pay short term debts as they arise.

  7. Acid-test (Quick) Ratio Current assets (less closing stock) ÷ Current liabilities A better test of the ability to pay short term debts as they arise.

  8. Debtors’ Turnover Ratio Closing debtors (before provision for bad debts) ÷ Net sales Demonstrates how quickly money has been received from debtors.

  9. Creditors’ Turnover Ratio Closing creditors ÷ Net purchases The speed at which creditors are being paid the amount owed to them.

  10. Gross Margin Ratio Gross profit ÷ Net sales The value of gross profit being earned from every dollar of sales.

  11. Gross Mark-up Ratio Gross profit ÷ Cost of sales The value of gross profit being generated from every dollar spent on getting the items in a state suitable for sales.

  12. Net Profit Ratio Net profit (before interest and tax) ÷Net sales x 100 The value of net profit being earned from every dollar of sales.

  13. Return On Capital Employed (ROCE) Net profit (before interest and tax) ÷ Capital employed x 100 For an unincorporated business, the capital employed = (Opening Capital + Closing Capital)÷2 This percentage is the overall test of management's ability to efficiently utilise its scarce resources.

More Related