Ratio Analysis

2. Net Profit: Total revenue – Total Costs (VC+FC)

                                    Net Profit before int and tax.

Net Profit Margin =     ---- ------------------------            x 100

                                                  Turnover

                                                      Retained Profit

3. Retained Profit Margin = ------------------- x  100    

             Turnover          

         

• Efficiency Ratios- shows how well the business has performed

• Shows how effective the firm is in using its capital to generate profit

1. Return on Capital Employed (ROCE)

                Profit for the Year before int and tax

ROCE = -----------------------------------   x     100

                            Capital employed

2. 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.
• Too high – Might suggest that too much of its assets are tied up in unproductive activities. For eg. too much stock.

2. Acid Test Ratio = (Current Assets - Stocks) : Current Liabilities 

• The Acid Test Ratio gives an indication whether a firm can meet its liabilities without having to dispose of its stocks.
• Gives a clear and quick indication of the state of the firm’s liquid assets.

Comparing the Current ratio and the Acid Test ratio provides indication of the stock holdings of a firm.

• 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.