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MDCL - Ratios 3
Changes in ratios
| Question | Answer |
|---|---|
| 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
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