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8/8/2019 Acc profLiqRatios
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FDgFDg Managing FinanceManaging FinanceLesson Aims
To learn the common accounting ratios To understand what they mean / how
they can be improved
To analyse accounts by means of the
ratios
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Usersof AccountsUsersof Accounts people whopeople who
read / interpret financialstatementsread / interpret financialstatements
Owners / Investors Lenders / Creditors / Suppliers
Employees
Tax Authorities Customers
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Use of Ratio
s/ Percentage
sUse of Ratio
s/ Percentage
s
Makes it possible to compare one
business with another even if they are
of different size
Makes it possible to compare the
progress / decline of a business over
time by identifying trends
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Analysis
of Accounts
will focus
onAnalysis
of Accounts
will focus
on
Profitability
Liquidity ability to pay debts
Financial Strength e.g. extent to which
business relies on borrowing
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Apply accounting ratios toApply accounting ratios to
Task
1 dodge packagingTa
sk1 dodge pac
kagingPart A dax LtdPart A dax Ltd
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Profitability Percentages
Profitability Percentages
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Return on Capital EmployedReturn on Capital EmployedNet Profit
ShareholdersFunds
= return on capital employedx 100
25000 x 100 = 21.1%25000 x 100 = 21.1%
118300118300
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Gro
ssProfit Margin
Gro
ssProfit Margin
Gross Profit
Sales
= gross profit marginx 100
55000 x 100 = 31.4%55000 x 100 = 31.4%
175000175000
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Net Profit Margin
Net Profit Margin
Net Profit
Sales
= net profit marginx 100
25000 x 100 = 14.3%25000 x 100 = 14.3%
175000175000
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GearingGearing comparesborrowedcomparesborrowed
money with owners capitalmoney with owners capital
BorrowingsCapital
= gearingx 100
29200 x 100 = 24.7%29200 x 100 = 24.7%
118300118300
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High Gearing = a large amount of
borrowing in relation to investment
Low Gearing = a small amount ofborrowing in relation to investment
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Intere
st Cover
Intere
st Cover
Net Profit before interest and tax
Interest payable= interest cover
29000 = 7.3 times interest covered by profit29000 = 7.3 times interest covered by profit
40004000
No figuresgiven for dax but assumeNo figuresgiven for dax but assumeinterest for year was4000interest for year was4000
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Liquidity Ratios / PeriodsLiquidity Ratios / Periods
Liquidity measures the business
ability to meet its debts /
obligations as they become due.
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Current Ratio / Working Capital RatioCurrent Ratio / Wor
king Capital Ratio
current assets
current liabilities
= current ratio
62500 = 2.58 : 162500 = 2.58 : 1
2420024200
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Liquidity Ratio/Quick
Ratio/Acid TestLiquidity Ratio/Quic
kRatio/Acid Te
st
current assets minus stock
current liabilities
= liquidity ratio
17500 = 0.72 : 117500 = 0.72 : 1
2420024200
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Stoc
kTurnover Period
Stoc
kTurnover Period
Average Stock
Cost of Sales
= stock turnover periodx 365
45000 x 365 = 13745000 x 365 = 137
120000120000
daysdays
= how long stock is held= how long stock is held
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Debtor Collection PeriodDebtor Collection PeriodAverage Debtors
Credit Sales
= debtor collection periodx 365
17500 x 365 = 3717500 x 365 = 37
175000175000
daysdays
= average period to collect trade debtors= average period to collect trade debtors
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Creditor Payment PeriodCreditor Payment PeriodAverage Creditors
Credit Purchases
= creditor payment periodx 365
15000 x 365 = 4615000 x 365 = 46
120000120000
days taken to pay creditorsdays taken to pay creditors
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Operating CycleOperating Cycle
Stock Turnover PeriodAdd
Debtor Collection
MinusCreditor Payment
= Operating Cycle
137 Days+
37 Days
-46 Days
= 128 Days
Period of time from paying forsupplies toPeriod of time from paying forsupplies togetting paid forsalesgetting paid forsales