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Business Performance Analysis (Part 2). Profitability Ratios Calculation (1) gross margin % = gross margin = sales - cost of sales (COS) sales sales operating.

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Presentation on theme: "Business Performance Analysis (Part 2). Profitability Ratios Calculation (1) gross margin % = gross margin = sales - cost of sales (COS) sales sales operating."— Presentation transcript:

1 Business Performance Analysis (Part 2)

2 Profitability Ratios Calculation (1) gross margin % = gross margin = sales - cost of sales (COS) sales sales operating profit % = operating profit = sales - COS - other operating expenses sales sales or profit before interest and tax (PBIT) profit before tax % = profit before tax = operating profit +/- net interest (PBT) sales sales net profit % = net profit = profit before tax (PBT) - corporation tax or sales sales return on sales (ROS)

3 return on investment (ROI) = operating profit _____ (pre-tax) or return on capital employed total assets - current liabilities (ROCE) % (usually averaged) return on equity (ROE) = profit after tax__ equity capital turnover = sales____ ________ average capital employed in year Profitability Ratios Calculation (2)

4 Efficiency Ratios

5 debtor days = trade debtors x 365 sales creditor days = trade creditors x 365 cost of sales (or purchases) stock days = stock value_________ or stock average daily cost of sales in period turnover finished goods raw materialswork in progress average weekly average weekly raw average weekly dispatchesmaterial usage production Efficiency Ratios Calculation (1)

6 Efficiency Ratios Calculation (2) stock weeks = total stock value_____ average weekly cost of sales (total COS for the year divided by 52) operating cycle (days) = stock days + debtor days - creditor days operating cycle % = working capital requirement (stocks + debtors - creditors) sales asset turnover (times) = sales __ total assets

7 Liquidity Ratios

8 Liquidity Ratios Calculation current ratio (times) = current assets__ current liabilities acid test (times) = current assets - stocks_ or quick ratio current liabilities defensive interval (days) = quick assets______ (current assets – stocks) average daily cash from operations

9 Investment Ratios

10 earnings per share = profit after tax - preference share dividends or number of ordinary shares in issue eps (pence) dividend per share = total dividends paid to ordinary shareholders number of ordinary shares in issue dividend cover = earnings per share dividend per share Investment Ratios Calculation (1)

11 dividend yield % = dividend per share share price price/earnings ratio = current share price or eps P/E ratio capital expenditure to sales % = capital expenditure for year sales capital expenditure to gross fixed assets % = capital expenditure for year___ gross value of tangible fixed assets Investment Ratios Calculation (2)

12 Financial Ratios

13 Financial Ratios Calculation (1) gearing = long-term debt equity + long-term debt debt equity ratio = long-term debt or leverage (D/E) equity

14 Financial Ratios Calculation (2) dividend cover (times) = earnings per share (eps) dividend per share interest cover (times) = profit before gross interest and tax gross interest payable which way also be considered in terms of cash flow: cash interest cover (times) = net cash inflow from operations + interest received interest paid

15 cash flow and cash ratios are becoming increasingly as important as profit and profitability ratios in the measurement of business performance there is no best way of evaluating financial performance and there are advantages and disadvantages in using earnings per share or cash flow as the basis of measurement The Best Performance Measure – Cash or Profit?

16 Format 1 Profit and Loss Account The Advantages and Disadvantages of Using Cash Flow as a Measure of Company Performance

17 Format 1 Profit and Loss Account The Advantages and Disadvantages of Using Earnings per Share (eps) as a Measure of Company Performance

18 Tomkins plc EBITDA for 1998 to 2002 earnings before interest, tax, depreciation and amortisation, EBITDA is now commonly used as a close approximation of a cash flow performance measure


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