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ratio analysis

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P5 Ratio analysis A ratio analysis is of great benefits to a business because it helps them in knowing the profitable, liquidity and efficiency of a business. This is used by a business in making any future plans or plans for the business. Ratio analyses are used to measure the performance of a business and they are very beneficial because they tell you where you stand in terms of finances. Bellow are the three different ratios that are used by accountants to find out the financial states of a business. Profitability is one of the most important aspects considered by a business, after all most businesses aim is profit making. This aspect looks at the profits made from sales and money that has been generated by the business. This shows the gross profit that is made in comparison to the sales, net profit made in comparison to sales and also the Return on capital employed. Liquidity is used to measure the business's ability to pay back their available debts. This talk about the solvency of the business which is the ability to pay back any money owed. Also the insolvency is discussed under this heading which means that a business is unable to pay back the debts that they owe. ...read more.


This is a high figure which suggest that high profits are made Net profit Net profit/sales for the year*100 61,500/200,000*100=30,75 The net profit figure shows that over all the business is making 30.75% is made in net compared to the sales of the year. This figure is positive and it shows that the business is operating with high profits ROCE Net profit for year before interest and taxes/capital employed*100 60092/91492*100=69,68 Liquidity Current ratio Current assets/current liabilities 22,200/7,700=2,8 This is a good outcome by the business as it Is way lower than 3.2 and just above 2.1. This means that the business is able to deal with its current assets effectively. Acid test ratio/liquidity ratio Current assets - stock/current liabilities 22,200-16,000/7,700=0,8 This result shows the business is very close to insolvency, which suggests the businesses inability to pay debts. Efficiency Debtors payment period Debtors/credit sales for the year*365=debtors collection period in days 5,900/200,000*365=10 This is a good result because it shows that the debtors are able to pay back expenses quickly and procedures in getting their money back are not necessary. Creditors payment period Creditors/credit purchases for the year*365 2,200/20,000*365=40, This suggests that the business will be bale to pay back its creditors in 20 days which is good because it shows that the business is able too pay back credits quickly. ...read more.


Finding out this information helps a business to see if they have the available assets to cover their liabilities. Acid test ratio/liquidity ratio = Current assets-stock/current liabilities This calculation is the same as the above but the stock figure is deducted. Reason being that it is not always certain how much will be made from the stocks as they will not always be sold on the set time or as planned or expected. Efficiency Debtors payment period = debtors / credit sales for the year x 365 This calculation is made to show on average how long it will take for the debtors to pay back the money owed by them to the business, this is measured in days. Creditors payment period = creditors / credit purchases for the year x 365 This calculation is used by accountants to figure out how long it will take for the business to pay back any of the debts they owe, this is measured in days. Rate of stock turnover = average stock / cost of goods sold x 365 This calculation is used by accountants to figure out how long it takes for the business to sell the stock held by them. This will be different for different businesses. For example a business that sells fruit and vegetable or perishable products will keep them for a lesser period than a clothes selling shop as their products might be thrown away after some time. ...read more.

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