Presentation on theme: "RATIO ANALYSIS 3 types Profitability – is the organisation earning more than it spends. Liquidity – is there enough money to cover all bills. Efficiency."— Presentation transcript:
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.
PROFITABILITY RATIOS 1. 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.
2. 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.
3. 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.
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.
2. Acid Test Ratio Formula – Current Assets less Stock/Current Liabilities Purpose – The same as Current Ratio but with stock taken out.
EFFICIENCY RATIO 1. 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.
2. 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
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.
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.
Does not take into account product development or declining products. Findings do not take into account staff morale or turnover.