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Ratio analysis is a technique commonly used to make better sense of financial data

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Introduction

Ratio analysis is a technique commonly used to make better sense of financial data and help inform makingfinancial decisions. It is not any use of making the decisions on its own it just alerts the managers to any areas that maybe of concern. Ration analysis does not look at sales revenue or profit in isolation, ratios put these figures into the context by comparing them with similar data. So instead of looking at the total profit generated by the business over a year, ratio analysis might compare this figure to the amount of capital that is available to the business. Ratio analysis can reveal which business is best at generating profit. Formula Formula With Figures Explanation Gross Profit Margin Gross Profit --------------- x 100 = % Sales 256200 ----------------- x 100 = 57.7% 444000 This ratio shows how well a business is trading. Gross profit has to meet expenses and costs to provide a reasonable net profit; this is also used in comparisons. This is considered to be good position for SIGNature to be in. ...read more.

Middle

Debtors --------------------- x 365 Sales 41000 ------------------ x 365 = 33.7 444000 This ratio shows how long debtors are taking to pay back. This is only an average of how long it takes; a high debtor?s period may show that a business is struggling to pay back its invoices on time and could experience potential cash shortage. Creditors Creditors ------------------------ x 365 Cost Of Sales 15500 -------------------- x 365 = 22.1 256200 This ratio measures how long a business takes to pay its debts. This is the average time it takes to The average time it takes to pay back is usually between 30 ? 60 days so therefore SIGNature?s is considered to be healthy for the type of business it is. Stock Turnover Cost of goods sold ---------------------------- X times Average Stock 199800 ----------------- = 33.3 6000 This ratio shows how much stock is just sitting around. Holding a lot of stock is bad for a business and the higher the number the more stock is just sitting around therefore the higher the number the worse situation the business is in the lower the number the better for the business. ...read more.

Conclusion

Liquidity is concerned with the management of a business?s working capital. Current assets are those that can be converted relatively easily into cash, as well as cash itself. These include debtors. Stocks are also liquid because although they have not been bought by customers yet they should generate cash in in the near future. Too much working capital can indicate that a business is not making the most efficient of it resources. Efficiency- it is good for a business to know how well it mange?s its resources with debtors, it creditors and the level of stock held by it. Failing to control these aspects of performance and deal with any problems that arise could well affect the future probability and even the survival of a business. Three of the main ratios to measure efficiency are: * Debtor?s payment period ? This ratio shows how long it takes customers/debtors to pay back on average, so that?s why it key to measuring a business?s efficiency. * Creditors payment period ? This ratio shows how long it takes for a company to payback it suppliers/creditors. * Rate of stock turnover ? This ratio shows how long it takes a business to sell or use it stock ...read more.

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