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Financial Ratios

Financial ratios for AAT level 4 financial performance

TermDefinitionMeaning
Gross profit Margin gross profit / turnover x 100 How much profit is being made regardless of the level of expenses
Net profit margin Net profit/ turnover x 100 How much profit is made after all the expenses and other costs have been taken into account
RETURN ON CAPITAL EMPLOYED (ROCE) (Operating profit/ non current assets + net current assets) x 100 or (operating profits/ capital + long term liabilities) x100 How much you are getting back for the investment you have made in the business
ASSET TURNOVER Turnover/(non current assets + net current assets) How hard your assets have been working in generating turnover
CURRENT RATIO Current Assets/ Current Liabilities Is the business able to pay its debts as they fall due.
QUICK RATIO Current Assets – Inventory/ Current Liabilities Is the business able to pay its debts as they fall due from the most liquid of its assets
RECEIVABLE COLLECTION (Trade receivables/credit sales) x 365 How long on average it takes a customer to pay you
PAYABLES PAYMENT PERIOD (trade payables/credit purchases) x 365 How long on average it takes you to pay a supplier
AVERAGE INVENTORY (opening inventory + closing inventory)/2 the average stock level held
AVERAGE AGE OF INVENTORY (average inventory/cost of sales) x 365 OR (closing inventory/cost of sales) x 365 Roughly how long stock is sitting in your warehouse before you sell it
INVENTORY TURNOVER Cost of sales/ average inventory OR Cost of sales/ closing inventory How many times in the year do you empty and refill your warehouse
GEARING RATIO (Loans + preference share capital)/ (Loans + preference share capital + equity) x 100 The percentage of debt that is financing the business
GEARING (DEBT TO EQUITY) RATIO (loans + preference share capital)/ equity) x 100 The percentage of debt that is financing the business.
Created by: KayeDavis