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CalmlyStressed
BUSINESS NOTES - Finance Ratios

Ratios usually come up when asked to analyze the performance of a business/enterprise - to show how well it is doing or why it is in the state it is in. There are 6 you can use to answer questions on ratios. You should only need about 1 or 2 from 3 or 4 headings of these ratios but they could ask you to describe one specifically too. I've listed them all out here and explained a bit about them as well. Hope this helps! _______________________________ PROFITABILITY (This is focused on how much profit the business makes) Gross Profit % / Gross Margin -> Gross Profit / Sales x 100 Net Profit % / Net Margin -> Net Profit / Sales x 100 Return on Capital Employed -> Net Profit / Capital Employed x 100 LIQUIDITY (How able the business is to make cash quickly - with "liquid" assets) Current Ratio / Working Capital Ratio -> Current Assets / Current Liabilities : 1. Ideal ratio = 2 : 1 Quick Ratio / Acid Test Ratio -> Current Assets - Closing Stock / Current Liabilities : 1 Ideal ratio = 1 : 1 ACTIVITY (The state of stock within the business) Average Stock -> Opening Stock + Closing Stock / 2 Rate of Stock Turnover -> Cost of Sales / Average Stock DIVIDEND POLICY (% Repaying debtors and giving money to shareholders) Dividends / Issued Share Capital x 100. GEARING (How much the business owes vs. how much the business is worth) Debt / Equity Ratio / Capital Structure -> Debt Capital : Equity Capital or Debt Capital / Equity Capital x 100. Equity is the Share Capital + Long Term (if there is one) + Reserves. Ideal Percentage = < (less than) 50% -> the company is low geared which means that it is worth much more than it owes. If more than 50% it is high geared and is at risk of going into a loss. SOLVENCY (The ability to pay off debts when or before they're due) Current Assets + Fixed Assets : Current Liabilities + Long Term Loan Ideal Ratio = x > y (The left-hand side should be greater than the right-hand side of the ratio in the ideal situation)


1 Comments
Robin1
Robin1
thanks man
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