Finance Ratios Formulas

							Using ratios
So use your colour sheet
What do these ratios mean?
   NPM of 24%                   Acid test ratio of 1.8 : 1 ?
   ROCE of 15%                  Acid test ratio of 0.78 : 1 ?

   Debtor days of 20 and        Gearing of 12% or Gearing of
    Creditor days of 10.          66% - which is better for the
                                  business?
   Stock turnover of 12 times?
                                 Why is it a bad situation for a
   Dividend per share 80p        company to have a gearing of
                                  90%?
   Dividend yield 5%
Interpreting Ratios
   Textbook p169 B1 …..      Which
    Do Q3                      business
                               would you
                               buy based
                               on the
                               quantitative
                               factors?




                                   Not too sure about the
                                          wobble!
      Your       1st
               go at
  calculating ratios
You will need your ratio colour
           sheet & a calulator
 Your go – Calculate ratios…
                                     Balance Sheet                                £m
Income Statement       £m            Non-current assets                           19550
Revenue                 35400        Inventories                                   2375
Cost of sales          (30100)       Receivables                                   1170
Gross profit             5300        Cash & cash equivalents                       2300
Expenses                 (720)       Total current assets                          5845
Operating profit         4580        Current liabilities                          (8160)
Finance income            300        Net current liabilities                      (2315)
Finance cost             (260)       Non-current liabilities                      (6000)
Profit before tax        4620        Net assets                                   11235
Taxation                (1109)
Profit for the year      3511        Share capital                                 6000
                                     Reserves & retained earnings                  5235
                                     Total equity                                 11235


    ROCE                            Asset Turnover
    Gearing                         Inventory / Stock Turnover
    Current Ratio                   Payable days (assume payables are 50% of
                                      current liabilities for your calculation)
    Acid Test Ratio
                                     Receivable days
Formulas needed…
  ROCE
Operating profit x 100
total equity + non-current liabilities

  Gearing
Non-Current Liabilities     x 100
total equity + non-current liabilities

 Current Ratio
Current Assets : Current Liabilities

 Acid Test
Current Assets - inventories :
  Current Liabilities
Formulas needed…
  Asset Turnover
Revenue
Net assets

  Inventory/ Stock Turnover
Cost of sales
Inventory

  Payables (Creditors) days
Payables         x 365
cost of goods sold

  Receivables (Debtors) days
Receivables x 365
Revenue
Answers
Profitability ratio
 Income Statement                         £m             Balance Sheet                   £m
 Revenue                                   35400         Non-current assets              19550
 Cost of sales                            (30100)        Inventories                      2375
 Gross profit                               5300         Receivables                      1170
 Expenses                                   (720)        Cash & cash equivalents          2300
 Operating profit                           4580         Total current assets             5845
 Finance income                              300         Current liabilities             (8160)
 Finance cost                               (260)        Net current liabilities         (2315)
 Profit before tax                          4620         Non-current liabilities         (6000)
 Taxation                                  (1109)        Net assets                      11235
 Profit for the year                        3511
                                                         Share capital                    6000
                                                         Reserves & retained earnings     5235
                                                         Total equity                    11235
 ROCE
 Operating profit        x 100
 total equity + non-current liabilities             For every £1 of capital employed in the business
                                                         how much is being generated in profit?
     4580                 x 100
 11235 + 6000                                        Why would it be meaningful to compare this
                                                          to the current rate of interest?
 4580         x 100 = 27%
 17235                                                 Why might a high street retailer compare
                                                         ROCE between individual stores?
Gearing ratio
Income Statement                       £m
Revenue                                35400    Balance Sheet                         £m
Cost of sales                        (30100)    Non-current assets                  19550
Gross profit                           5300     Inventories                          2375
Expenses                               (720)    Receivables                          1170
Operating profit                       4580     Cash & cash equivalents              2300
Finance income                          300     Total current assets                 5845
Finance cost                           (260)    Current liabilities                 (8160)
Profit before tax                      4620     Net current liabilities             (2315)
Taxation                              (1109)    Non-current liabilities             (6000)
Profit for the year                    3511     Net assets                          11235

                                                Share capital                        6000
                                                Reserves & retained earnings         5235
                  Gearing                       Total equity                        11235

      Non-Current Liabilities x 100
    total equity + non-current liabilities

                    6000              x 100
              (11235 + 6000)                    For every £1000 invested in this business how
                                                      much of it is from long term loans?
                     =
                6000 x 100                     Why might a high gearing be more of a concern to
               17235                                a business with small profit margins?

                   =35%
Liquidity ratios
              Current Ratio
    Current Assets : Current Liabilities

               5845 : 8160                  Balance Sheet                  £m
                = 0.716 : 1                 Non-current assets             19550
 For every £1 of CL the firm owes it owns   Inventories                     2375
                                            Receivables                     1170
               £0.716 in CA                 Cash & cash equivalents         2300
                                            Total current assets            5845
                                            Current liabilities            (8160)
                                            Net current liabilities        (2315)
              Acid Test                     Non-current liabilities        (6000)
   Liquid Assets : Current Liabilities      Net assets                     11235

                                            Share capital                   6000
          1170 + 2300 : 8160                Reserves & retained earnings    5235
             = 3470 : 8160                  Total equity                   11235
               = 0.425 : 1
For every £1 of CL the firm owes it owns
              £0.425 in CA
Financial Efficiency ratio
Income Statement            £m
                                          Balance Sheet                     £m
Revenue                    35400
                                          Non-current assets              19550
Cost of sales             (30100)
                                          Inventories                      2375
Gross profit                5300
                                          Receivables                      1170
Expenses                    (720)
                                          Cash & cash equivalents          2300
Operating profit            4580
                                          Total current assets             5845
Finance income               300
                                          Current liabilities             (8160)
Finance cost                (260)
                                          Net current liabilities         (2315)
Profit before tax           4620
                                          Non-current liabilities         (6000)
Taxation                   (1109)
                                          Net assets                      11235
Profit for the year         3511
                                          Share capital                    6000
                                          Reserves & retained earnings     5235
                                          Total equity                    11235

 Asset Turnover

           Revenue
                                       For every £1 of net assets in the business
           Net assets
                                       how much is being generated in revenue?
           35400
                                    What is meant by the term sweating your assets?
           11235
                                    Why might asset turnover help a business assess
           = 3.15 times
                                       operational efficiency between factories?
Financial Efficiency ratio
Income Statement               £m
Revenue                       35400    Balance Sheet                  £m
Cost of sales                (30100)   Non-current assets             19550
Gross profit                   5300    Inventories                     2375
Expenses                       (720)   Receivables                     1170
Operating profit               4580    Cash & cash equivalents         2300
Finance income                  300    Total current assets            5845
Finance cost                   (260)   Current liabilities            (8160)
Profit before tax              4620    Net current liabilities        (2315)
Taxation                      (1109)   Non-current liabilities        (6000)
Profit for the year            3511    Net assets                     11235

                                       Share capital                   6000
                                       Reserves & retained earnings    5235
 Inventory/ Stock Turnover             Total equity                   11235

            Cost of sales
             Inventory
                                       On average for how long
 30100
 2375
                                         does this business
                                             hold stock?
 =12.67 times
Financial Efficiency ratio
Income Statement                          £m
Revenue                                  35400       Balance Sheet                    £m
Cost of sales                           (30100)      Non-current assets             19550
Gross profit                              5300       Inventories                     2375
Expenses                                  (720)      Receivables                     1170
Operating profit                          4580       Cash & cash equivalents         2300
Finance income                             300       Total current assets            5845
Finance cost                              (260)      Current liabilities            (8160)
Profit before tax                         4620       Net current liabilities        (2315)
Taxation                                 (1109)      Non-current liabilities        (6000)
Profit for the year                       3511       Net assets                     11235

                                                     Share capital                   6000
 Payables (Creditors) days                           Reserves & retained earnings    5235
                                                     Total equity                   11235
 Payables         x 365
 cost of goods sold
                                                   Receivables (Debtors) days

 Assumed payables are 50% of current liabilities   Receivables   x 365
                                                   Revenue
 4080 x 365
                                                   1170 x 365
 30100
                                                   35400

 = 49 days                                         = 12 days
                            You can calculate Net Profit and
Interpreting Ratios            another profitability ratio!



   Dodgy scanning   
                         Non current assets




                                    Working Capital = CA – CL
                                        = 280 – 200 = 80


                                      Capital Employed = Share
                                         capital + reserves
                      ROCE = op profit / capital
                            employed
Interpreting Ratios




                       NPM = net profit /turnover
                         10% of 1,460,000


                      180/1460 x 365 = 45 days
Homework
   Complete the worksheet – this stakeholder
    will have an interest in this
    ratio…because????