Notesale: Turn your study into money

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Ratio Analysis
Ratio Analysis involves using numbers from financial statements to
provide a deeper analysis of company performance and position
as opposed to just looking at the statements themselves
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They
may be percentages, number of days, actual ratios or take any
other form which best conveys the required information
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Comparison with comparable businesses indicates whether the
business is profitable and operating efficiently compared to
competitors
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Most
businesses should expect to make a gross profit of 40 – 60 percent
if the business is to make a profit after paying for other expenses
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g
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Net profit margin (also known as Operating profit margin)
Net profit x 100 = X%
Sales
This indicates the Profit margin after expenses
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The Net Profit Margin, like other ratios, varies

considerably between companies, a figure of 18% - 23% is
regarded as good
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It reflects the performance of the management in using
the funds available to them
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Prevailing interest rates can
be used as a guide in determining whether a reasonable return
has been achieved
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It compares
cash and assets that should soon be converted into cash, to
liabilities that will soon require payment
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5 times the current assets then the business is in a fairly strong
position as regards its ability to meet its immediate commitments
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The
ratio in this case should be 1:1 and lower ratios than this indicate
potential problems and must be carefully watched
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Suppliers payment period
Trade Payables X 365 = x Days
Cost of sales
This shows how long it is taking us to pay our suppliers
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In general terms the higher the asset turnover the harder the
assets are being worked and the greater will be the profit
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Financial Leverage (Debt) ratio
Gearing ratio
Long term debt
Long term debt + equity
This ratio shows how much of the company’s financing is from
debt, if the ratio is significantly > 50% then it is highly geared and
more risky (due to high interest payments and most if not all major
assets secured against loans)

Market value ratio
Earnings per share
The EPS is an indicator of profitability is commonly cited in the
financial press and shows the average profits per share in issue
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This checks the success of management in
controlling expenses
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g
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- Type of company we are looking at needs to be taken into
account – a store selling furniture on credit is likely to have a
higher debtors day figure than a grocery store
- They are only as accurate as the information used to
produce them – if the figures in the accounts are inaccurate
then the ratios based on them will be too



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