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Unit 2 Exploring Business Activity P6 - ratios

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Introduction

Unit 2: Exploring Business Activity Assignment 3 P6 Profitability Ratios Return on capital employed (ROCE) Net Profit / Average capital employed x 100 = % return This ratio measures the efficiency of capital investments. It is worked out by considering the net profit as a percentage of the capital employed by that business. The reason this ratio is so useful is because it shows the amount of money an investor is receiving back on their capital as a percentage. Return on Net Assets Net Profit for year / Net Assets x 100 = % return Gives a percentage of how much return of net assets the business is getting from its investments. Gross Profit % Gross Profit / Sales x 100 = Gross Profit % This gives the gross profit percentage which is the profit made over a period without taking into account the operating costs or taxation. ...read more.

Middle

Solvency Ratios An organisation is able to pay its expenses as it has money available within the business, solvency ratios help measure this. Working Capital Ratio (Or Current Ratio) Current Assets / Current Liabilities = Working Capital Ratio Working capital ratio measures how much money you have to pay bills and looks at left over cash within the business. This shows how many assets a business has compared to liabilities, in other words how easy it would be for a business to pay its creditors. This figure should be between 1.5 and 2 so that the business can be sure it pays liabilities easily. Liquid Ratio (Quick Ratio or Acid Test) (Current Assets ? Stock) / Current Liabilities = Liquid Ratio This ratio shows the assets compared to liabilities like the current ration, but by taking out the stock figure from the current assets it shows how well a business can meet its liabilities without having to sell stock. ...read more.

Conclusion

The fewer the number of days, the better credit control the business has because it collects what is owed to it more quickly. If information about credit sales is not available the calculation can still be worked out by using the total sales figure. Credit Days Creditors / Cost Of Goods Sold x 365 = Creditor Days Creditor days are similar to debtor days but they look at how long it takes the business to pay their debts. The shorter the time period taken to pay for the debts the better it is for the business. Asset Turnover Sales / Net Assets = Asset Turnover This ratio looks at the sales as a percentage of the total assets that a business owns. By dividing the sales by the total assets, the business is able to work out how many pounds it earns for every pound invested in total assets. ...read more.

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