Scribd
Upload
138 views11 pages

Ratio Analysis: BY: Arshad Jamil 311sm1008

Ratio analysis is a quantitative process used to evaluate various aspects of a business's performance in key areas such as liquidity, profitability, financial leverage, and efficiency. Some common ratios analyzed include the current ratio, acid-test ratio, profit margins, return on capital employed, asset turnover, stock turnover, and debtor days. Calculating and comparing ratios over time and against industry benchmarks provides insights to aid decision making.

Uploaded by

Tapas Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
138 views11 pages

Ratio Analysis: BY: Arshad Jamil 311sm1008

Ratio analysis is a quantitative process used to evaluate various aspects of a business's performance in key areas such as liquidity, profitability, financial leverage, and efficiency. Some common ratios analyzed include the current ratio, acid-test ratio, profit margins, return on capital employed, asset turnover, stock turnover, and debtor days. Calculating and comparing ratios over time and against industry benchmarks provides insights to aid decision making.

Uploaded by

Tapas Kumar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 11

Ratio Analysis

BY: Arshad Jamil 311sm1008

Ratio Analysis
Purpose: To identify aspects of a businesss performance to aid decision making Quantitative process may need to be supplemented by qualitative factors to get a complete picture 5 main areas:

Ratio Analysis
1. Liquidity the ability of the firm to pay its way 2. Investment/shareholders information to enable decisions to be made on the extent of the risk and the earning potential of a business investment 3. Gearing information on the relationship between the exposure of the business to loans as opposed to share capital 4. Profitability how effective the firm is at generating profits given sales and or its capital assets 5. Financial the rate at which the company sells its stock and the efficiency with which it uses its assets

Acid Test
Also referred to as the Quick ratio (Current assets stock) : liabilities 1:1 seen as ideal The omission of stock gives an indication of the cash the firm has in relation to its liabilities (what it owes) A ratio of 3:1 therefore would suggest the firm has 3 times as much cash as it owes very healthy! A ratio of 0.5:1 would suggest the firm has twice as many liabilities as it has cash to pay for those liabilities. This might put the firm under pressure but is not in itself the end of the world!

Current Ratio
Looks at the ratio between Current Assets and Current Liabilities Current Ratio = Current Assets : Current Liabilities Ideal level? 1.5 : 1 A ratio of 5 : 1 would imply the firm has 5 of assets to cover every 1 in liabilities A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every 1 it owes Too high Might suggest that too much of its assets are tied up in unproductive activities too much stock, for example? Too low - risk of not being able to pay your way

Profitability
Profitability measures look at how much profit the firm generates from sales or from its capital assets Different measures of profit gross and net
Gross profit effectively total revenue (turnover) variable costs (cost of sales) Net Profit effectively total revenue (turnover) variable costs and fixed costs (overheads)

Profitability
Gross Profit Margin = Gross profit / turnover x 100 The higher the better Enables the firm to assess the impact of its sales and how much it cost to generate (produce) those sales Net Profit Margin = Net Profit / Turnover x 100 Net profit takes into account the fixed costs involved in production the overheads Keeping control over fixed costs is important could be easy to overlook for example the amount of waste paper, stationery, lighting, heating, water, etc.

Profitability
Return on Capital Employed (ROCE) = Profit / capital employed x 100 Be aware that there are different interpretations of what capital employed means The higher the better Shows how effective the firm is in using its capital to generate profit Partly a measure of efficiency in organisation and use of capital

Asset Turnover
Asset Turnover = Sales turnover / assets employed Using assets to generate profit Asset turnover x net profit margin = ROCE

Stock Turnover
Stock turnover = Cost of goods sold / stock expressed as times per year The rate at which a companys stock is turned over A high stock turnover might mean increased efficiency? But: dependent on the type of business supermarkets might have high stock turnover ratios whereas a shop selling high value musical instruments might have low stock turnover ratio Low stock turnover could mean poor customer satisfaction if people are not buying the goods (Marks and Spencer?)

Debtor Days
Debtor Days = Debtors / sales turnover x 365 Shorter the better Gives a measure of how long it takes the business to recover debts Can be skewed by the degree of credit facility a firm offers

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy