• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. Sources Of Finance

    are bought, this contributes to the success of the business as there is a continuous flow of finance. How ever some times shares can take a long time to sell which can cause the business to struggle financially during this period.

  2. A2 Business CourseWork

    This gives customers important information and optimally the choice of what kind of products they wish to buy. It gives customers what they want to see - the level of GDA which enables them to choose about the health values they follow.

  1. Sainsbury's Ratio Analysis

    Under the Ratio Analysis, there are three main headings that I have used to calculate Sainsbury's performance: 1 Profitability - These analyse the profit made over the last year. 2 Liquidity - These measure the solvency of the business and its ability to meet short-term debts.

  2. Financial Ratio Analysis.

    We have prepared an appendix of ratios (see Appendix 1), a trend analysis report (see Appendix 2) and a set formulas of the ratios used (see Appendix 3). Profitability Ratios The Return on Capital Employed (ROCE) and the Return on Owners' Equity (ROE or ROOE)

  1. Accounting Ratios. By using ratios Hills System ltd can monitor their businesss performance. ...

    Bank loan Money the business owes the bank. They borrowed �610,000 in 2007 and �410,000 in 2008. Net profit They money the business has after all the expenses are deducted. Their net profit in 2007 is �318,000 and �480,000 in 2008.

  2. Break even analysis

    However, as the scale of the business grows (e.g. output, number people employed, number and complexity of transactions) then more resources are required.

  1. ASSIGNMENT P5, M2 & D2- RATIO ANALYSIS

    However, there will be no essential needs to monitor them. Although, the ratio is expressively high, this proves the company is not using their additional assets. Efficiency Debtor?s payment period is this calculation which gives the company a measure of how long it may take the business to recover debts.

  2. Ratio Analysis. I am going to illustrate the financial state of Chester Private ...

    This measurement is often used to compare with interest rates in order to see the efficiency of an investment/generating a return. Overall, the profitability needs to be improved in order to expand the business. The business seems to have a higher level of gross profit comparing it to the net

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work