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Financial Ratios

AAT Financial Statements for limited companies

TermDefinitionMeaning
Return on Capital Employed (ROCE) (Operating profit/non current assets +net current assets) x 100 or (operating profit/ capital + long term liabilities) x 100 How much are you getting back for the investment you have made in the business
Current Ratio Current Assets/ Current Liabilities Is the business able to pay its debts as they fall due
Quick Ratio or Acid Test Current Assets - Inventory / Current Liabilities Is the business able to pay its debts as they fall due from the most liquid of its assets
Trade Receivables collection (Trade receivables/ Credit sales) x365 How long on average it takes a customer to pay you
Average Inventory (opening inventory+ closing inventory)/2 The average stock level held for the period
Inventory holding period (average inventory/ cost of sales) x365 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) x100 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
Return on shareholders funds Profit after tax/total equity x 100 The return that the shareholders get (not a dividend but the potential return)
Operating profit percentage Operating profit/ Turnover x 100 The amount of operating profit made (this is after expenses) expressed as a % of turnover
Working capital cycle Inventory days + Receivable days - payable days The amount of time that you need short term finance available. It is the gap between when you pay for purchases and when you get the income from your customers
Asset turnover (net assets) Revenue/ (total assets- current liabilities) Measures the efficiency of the use of net assets in generating revenue. Measures the number of £s of revenue that is generated per £ of net assets
Asset turnover (total assets) Revenue/ Total assets Measures the efficiency of the use of total assets in generating revenue. Measures the £ of revenue generated by £ of total assets
Interest cover Profit from operations/ finance costs The number of times a company could pay its interest payments using its profit from operations. The lower the number of times the higher risk of not being able to pay
Gross Profit Margin Gross Profit/Turnover x 100 How much profit is being made regardless of the level of expenses
Created by: KayeDavis