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Financial Ratios
AAT Financial Statements for limited companies
| Term | Definition | Meaning |
|---|---|---|
| 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
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