• 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

    But overall is a good way for a private limited company to obtain finance as it is an option that they have open to them unlike unlimited companies. The final type of enterprise in the private sector is a public limited company this could use a bank loan to obtain

  2. Profitability and Liquidity

    The balance sheet below shows the assets and liabilities of my company within a year. Balance Sheet for 'Passion4Fashion': Fixed Assets Premises Equipment � � 600 Current Assets Stock Cash in Bank Cash in hand Current Liabilities Trade Creditors Net Current Assets Long term Liabilities Bank Loan NET ASSETS FINANCED

  1. A2 Business CourseWork

    try their best to put products were customers think they should be, otherwise they may not find them. 'Earn lifetime loyalty': This area is to do with customer retention. Getting repeat customers is crucial to any business because otherwise you will eventually exhaust the amount of possible customers.

  2. Sainsbury's Ratio Analysis

    3 Efficiency (Working Capital Management) - These analyses the efficiency of the business in terms of the use of its resources in generating sales. Profitability Profitability is a factor that is most important to owners of business is its profitability. The following ratios can help monitor the company's profit performance.

  1. ratio analysis

    This shows that for every �1 invested in net assets, �3.99 and �1.12 were generated. Because both of them are airline companies, there is often a heavy investment in fixed assets, which leads to the ratio being generally low. In addition, the stock turnover is very low which is at

  2. ASSIGNMENT P5, M2 & D2- RATIO ANALYSIS

    Calculation: It will take SIGNature approximately a month to recover their debts. This shows that the company has a good relationship with their shareholder and this helps them to recover their debts as soon as possible. Creditor?s payment period is the calculation which gives the organisation a measure of how

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

    current ratio (YEAR 2007): CURRENT ASSETS 175 : 1 = : 1 = 1.59 : 1 CURRENT LIABILITIES 110 Current ratio has fall over the year period of time by 0.46. A good practice is only considered if the current ratio has a figure between 1.5 and 2 ? this shows that the business is easily paying its liabilities.

  2. You need to make judgement on each ratio- does it show the business is ...

    If net profit margin falls from one year to the next or is thought to be too low, a firm may look to reduce its expenses, for example, by moving to cheaper premises or cutting staffing costs. Before taking any action, however the accountant must try to identify the cause

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