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MDCL - Ratios 3

Changes in ratios

QuestionAnswer
Decrease in Gross Profit percentage Decrease is bad Less Gross profit being generated by sales Due to decreased sales price or increased cost of sales or both
Increase in Gross Profit percentage Increase is good More Gross profit being generated by sales Improvement due to increased sales price/decreased cost of sales or both
Decrease in operating profit percentage Decrease is bad Less operating profit is generated by sales Due to decrease in GP% or increased overheads or both
Increase in operating profit percentage Increase is good More operating profit is generated by sales Due to increase in GP% or decreased overheads or both Reason can be confirmed by expense/revenue %
Decrease in expense/revenue percentage Decrease is good Shows improved control of overheads
Increase in expense/revenue percentage Increase is bad Shows deterioration in control of overheads Overheads have increased more than sales revenue
Decrease in Return on Capital Employed Decrease is bad Deterioration in the return on capital Less profit per £ of capital employed has been generated. % should be compared to other investment rates e.g. bank account
Increase in Return on Capital Employed Increase is good Improvement in return on capital More profit per £ of capital employed has been generated. % should be compared to other investment rates e.g. bank account
Decrease in Return on total assets Decrease is bad Shows deterioration in the return on total assets Less profit per £ of total assets has been generated
Increase in Return on total assets Increase is good Shows an improvement in the return on total assets More profit per £ of total assets has been generated
Decrease in return on equity Decrease is bad Deterioration in the profit generated from equity May be off putting to shareholders/potential investors
Increase in return on equity Increase is good Improvement in the profit generated from equity Attractive to existing shareholders/new investors
Decrease in earnings per share Decrease is bad Each share is earning less profit after tax May be off putting to share holders/new investors
Increase in earnings per share Increase is good Each share is earning more profit after tax Attractive to existing shareholders and new investors
Decrease in return on net assets Decrease is bad Deterioration, less profit per £ of net assets has been generated
Increase in return on net assets Increase is good Improvement, more profit per £ of net assets has been generated
Decrease in current/working ratio Decrease in ration especially if below 2:1 is bad Deterioration in liquidity Possible difficulties paying suppliers and continuing to trade
Increase in current/working ratio Increase is good as indicates an improvement in liquidity If well above 2:1 could indicate too many current assets
Decrease in quick/acid test ratio Decrease below 1:1 is bad Deterioration in liquidity Current liabilities exceed liquid assets Company may have difficulties paying suppliers and continuing to trade
Increase in quick/acid test ratio Increase above 1:1 is good Improvement in liquidity Liquid assets exceed current liabilities
Decrease in Interest Cover Decrease below 2:1 is bad Deterioration in the amount of operating profit to cover interest costs Company is more risky - may have difficulty meeting future interest costs Shareholders unlikely to invest further funds - less profit for dividends
Increase in Interest Cover Increase especially if above 2:1 is good Improvement in the amount of operating profit to cover interest costs The company is stronger/less risky Lenders are likely to lend further if required Company more attractive to new investors
Decrease in Gearing Decrease especially if below 50% is good Improvement will be due to decrease in borrowing/increase in equity or both. Equity is preferable to borrowing - Dividends are only paid if profit made, Interest has to be paid even if a loss
Increase in Gearing Increase if above 50% is bad Deterioration is usually due to increased borrowings (with higher interest costs/lower profit for dividends
Inventory turnover and inventory holding period Decrease in days or increase in times a year is good Indicates an improvement in stock control/more efficient management Increase in days or decrease in times a year is bad Taking longer to sell inventory, Indicate a deterioration in stock control
Decrease in trade receivables collection period Decrease in days is good Indicates an improvement in trade receivables control/ more efficient management
Increase in trade receivables collection period Increase in days is bad Receivables are taking longer to pay their debts Less efficient control or bad debts which reduce profit
Decrease in trade payables payment period Decrease in days in bad Business is not taking advantage of supplier credit Improves supplier relationship - negative impact on cash flow
Increase in trade payables payment period Increase in days is good Business is taking advantage of supplier credit If business is experiencing liquidity problems it could also indicate an inability to pay sooner
Decrease in working capital cycle Decrease in days is good Improved cash flow and more efficient management
Increase in working capital cycle Increase is days is bad More pressure on cash flow and less efficient management
Decrease in asset turnover Decrease is bad Indicates a lower efficiency May be due to the purchase/revaluation of assets or a decrease in revenue or both Consider whether new items of PPE were purchased late in the year
Increase in asset turnover Increase is good Indicates a greater efficiency May be due to an increase in revenue or a decrease in assets or both
Created by: ChrisMorgan