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    Ratio Analysis: 1. Gross Profit Percentage

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    annabell
    The document defines and explains 11 different financial ratios used to analyze business performance: 1) Gross profit percentage and net profit percentage measure profitability. 2) Return on capital employed and return on equity measure profit relative to capital invested. 3) Rate of stock turnover, current ratio, and acid test ratio measure liquidity and ability to meet short-term obligations. 4) Debtors to sales ratio and creditors to purchases ratio measure collection and payment periods for debtors and creditors. 5) Earnings per share measures profit distribution to shareholders. 6) Dividend yield measures dividend return relative to share price. Ratios alone do not explain results and need seasonal factors

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    Ratio Analysis: 1. Gross Profit Percentage

    Uploaded by

    annabell
    14 views4 pages
    The document defines and explains 11 different financial ratios used to analyze business performance: 1) Gross profit percentage and net profit percentage measure profitability. 2) Return on capital employed and return on equity measure profit relative to capital invested. 3) Rate of stock turnover, current ratio, and acid test ratio measure liquidity and ability to meet short-term obligations. 4) Debtors to sales ratio and creditors to purchases ratio measure collection and payment periods for debtors and creditors. 5) Earnings per share measures profit distribution to shareholders. 6) Dividend yield measures dividend return relative to share price. Ratios alone do not explain results and need seasonal factors

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    The document defines and explains 11 different financial ratios used to analyze business performance: 1) Gross profit percentage and net profit percentage measure profitability. 2) Return on capital employed and return on equity measure profit relative to capital invested. 3) Rate of stock turnover, current ratio, and acid test ratio measure liquidity and ability to meet short-term obligations. 4) Debtors to sales ratio and creditors to purchases ratio measure collection and payment periods for debtors and creditors. 5) Earnings per share measures profit distribution to shareholders. 6) Dividend yield measures dividend return relative to share price. Ratios alone do not explain results and need seasonal factors

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views4 pages

    Ratio Analysis: 1. Gross Profit Percentage

    Uploaded by

    annabell
    The document defines and explains 11 different financial ratios used to analyze business performance: 1) Gross profit percentage and net profit percentage measure profitability. 2) Return on capital employed and return on equity measure profit relative to capital invested. 3) Rate of stock turnover, current ratio, and acid test ratio measure liquidity and ability to meet short-term obligations. 4) Debtors to sales ratio and creditors to purchases ratio measure collection and payment periods for debtors and creditors. 5) Earnings per share measures profit distribution to shareholders. 6) Dividend yield measures dividend return relative to share price. Ratios alone do not explain results and need seasonal factors

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Ratio Analysis

    1. Gross Profit Percentage :

    GROSS PROFIT x 100


    SALES
    This ratio shows how effectively a business has controlled it’s cost of goods.

    The Gross Profit ratio will change if:


    a) the selling price of goods changes
    b) the cost price of goods change

    2. Net Profit Percentage

    NET PROFIT x 100


    SALES
    This ratio shows how effectively the expenses of the business are controlled

    The Net Profit ratio will change if :


    a) the gross profit ratio changes
    b) expenses change

    3. Return on Capital Employed:

    NET PROFIT x 100


    CAPITAL EMPLOYED
    This ratio shows the net profit made for each $100 invested by the owner into the
    business. The higher this percentage the better.

    IMPORTANT – often, examiners will take capital employed to mean Average Capital.
    This means adding the open and closing balance of capital and divide by 2 to get the
    average. If you are only given the closing Capital, then use this figure.

    A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes


    4. Rate of Stock Turnover

    Cost of Sales
    Average stock
    Average Stock is: Open stock + Closing stock
    2
    This ratio shows how quickly a business sells it’s stock. The higher this ratio the better.

    5. Current Ratio

    CURRENT ASSETS
    CURRENT LIABILITIES
    This ratio compares the ability to use current assets to pay the current liabilities.

    An ideal ratio is 2:1. A ratio too high means that the business has more current assets than
    it needs.

    6. Acid test (quick) Ratio

    CURRENT ASSETS – STOCK


    CURRENT LIABILITIES
    This ratio shows if there is enough cash assets to pay current liabilities. Stock is the least
    cash – like current asset and so it is subtracted.

    An ideal ratio is 1:1.

    7. Debtors to Sales Ratio

    DEBTORS x 365 days(or 12 months)


    CREDIT SALES
    This ratio shows how long a business takes to collect money in from it’s Debtors. The
    higher the ratio, the worse the business is at getting debtors to pay on time and the more
    likely it is to have a high level of bad debts and cash problems.

    A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes


    8. Creditors to Purchases Ratio

    CREDITORS x 365 DAYS ( or 12 months)


    CREDIT PURCHASES
    This ratio shows how long a business takes to pay it’s creditors. Taking too long to pay
    creditors is not a good thing as discounts for early payment are lost or suppliers could
    refuse to supply goods to the business on credit.

    9. Return on Equity

    Profit after tax, interest and prefered dividends x 100


    Ordinary share capital + reserves
    This ratio measures the return earned on the money provided by the Ordinary
    Shareholders. The higher this answer the better. The ROE should be compared to
    previous years in order to see if the trend is on the increase or decrease.

    10. Earnings per Share

    Profit after tax and preferred dividends x 100


    Number of ordinary shares issued
    This ratio calculates how much of the profits are attributable to each ordinary share
    bought in the company. The higher this figure is the more happy Ordinary shareholders
    will be.

    11. Dividend Yield

    Dividend per share x 100


    Market price
    Shareholders pay the market price for shares. This ratio shows the return (dividend)
    each shareholder receives as a percentage of the price paid for the share. The higher
    this figure the better. Shareholders will usually calculate this ratio for several
    companies they are thinking of buying shares in, to see which will pay the highest
    dividend compared to the market price paid for the share.

    A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes


    Limitations of Ratios

    1. Results do not explain the results but merely show which areas of the business
    need further investigation

    2. Ratios do not take seasonal factors into account.

    3. For ratios to be accurate, the information must be timely to be of use –


    information may not be available for a long time after the end of the financial
    year.

    4. To be useful, ratios must be accurate – some information may not be shown in the
    accounts of the business.

    A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes

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