# Finance Ratios Formulas

Document Sample

```					Using ratios
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
   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
would you
on the
quantitative
factors?

wobble!
go at
calculating ratios
You will need your ratio colour
sheet & a calulator
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
   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
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
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????

```
DOCUMENT INFO
Shared By:
Categories:
Stats:
 views: 54 posted: 2/4/2011 language: English pages: 18
Description: Finance Ratios Formulas document sample