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Published byFaith Vega Modified over 7 years ago

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RATIO ANALYSIS 3 types Profitability – is the organisation earning more than it spends. Liquidity – is there enough money to cover all bills. Efficiency – is the firm making the best use of its resources.

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**PROFITABILITY RATIOS Gross Profit Percentage**

Formula – Gross Profit/Sales x 100 Purpose – to show how many pence of Gross Profit is made from every £1 of sales.

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Net Profit Percentage Formula – Net Profit/Sales x 100 Purpose – to show how many pence of Net Profit is made from every £1 of sales.

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Profit Mark-Up Formula – Gross Profit/Cost of Goods Sold x 100 Purpose – to work out the percentage added to costs to work out selling price.

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**LIQUIDITY RATIOS Current Ratio (Working Capital Ratio)**

Formula – Current Assets/Current Liabilities Purpose – to show whether the firm can covers its short term debts with is short term assets.

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Acid Test Ratio Formula – Current Assets less Stock/Current Liabilities Purpose – The same as Current Ratio but with stock taken out.

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**EFFICIENCY RATIO Return on Capital Employed**

Formula – Net Profit/Capital Employed x 100 Purpose – to work out the percentage return investors will get on their investment in the firm.

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**Formula – Cost of Goods Sold/Average Stock**

Rate of Stock Turnover Formula – Cost of Goods Sold/Average Stock Average stock = opening stock + closing stock/2 Purpose – to work out how many times in a financial period a firm buys and sells its stock

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USES OF RATIO ANALYSIS Compare current performance with previous years. Compare performance with a similar firm Identify differences in performance to help with decisions for the future Highlight trends over a period of time.

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**LIMITATIONS OF RATIO ANALYSIS**

Information gained from the accounts is historical – it only relates to the previous trading period. Comparisons with other organisations must be of a similar size and nature. Findings do not take into account other PESTEC factors.

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**Does not take into account product development or declining products.**

Findings do not take into account staff morale or turnover.

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