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Ratio Analysis

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RATIO ANALYSIS � Profitability ratios - a measure of how much profit its activities generate. 1. Gross Profit: Total Revenue - Variable (Direct) Costs Gross Profit Gross Profit Margin = -------------- x 100 Turnover - Narrow margins - tend to be on products/services which are high volume, mass market products which are highly competitive. Such as fmcgs', retail stores. - Wide margins - tend to be on products/services that are low volume, high value with relatively high degree of monopoly power. More frequent in the services sectors. - Can increase by increasing turnover relative to cost of sales like increasing prices. ...read more.


Stock Turnover Cost of goods sold Stock Turnover = ----------------------------------- Closing stock OR Closing Stock Stock Turnover = ----------------------------------- x 365 Cost of goods sold * Liquidity Ratios: Ease of the form to convert assets into cash. Also ability to meet its debts. 1. The Current Ratio - the proportion of assets to liabilities. Current Assets: Current Liabilities - A current ratio of 2:1 means the firm has sufficient liquidity to cover its liabilities twice over. - A current ratio of 0.75:1 would suggest that the firm is unable to meet its liabilities. It is in a weak financial position. ...read more.


* Shareholder's Ratios: a measure of the performance of the business by the view of the shareholders. 1. Earnings per share= Profit available after tax Number of equity shares The average profit earned per ordinary share 2. Dividends per share= Net profit after interest and tax No. of shares issued The average dividend received per ordinary share 3. Dividend Yield: Dividend per share x 100 Market Price * Gearing Ratio: Loan Capital x100 Capital Employed - Less than 50% shows that most of the capital is provided by the company itself. - High geared means there is too much borrowing and the firm is at risk. - Can reduce long-term borrowing relative to capital for better gearing ratio. ...read more.

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