 The more you use these ratios and the more you practice using them the easier it will be to remember the calculations, apply them in your exam and be able to analyse the result and the potential impact of this on the business.

 Ratios help to draw a comparison between figures in the accounts  By combining figures in the final accounts for a ratio analysis certain information can be found  Information in the final accounts can be interpreted for many different purposes

 Managers will want to see how well their business is going  The media may want to produce and publish reports about businesses  Shareholders may want information to see the rewards for holding shares  The Inland Revenue might want to investigate the performance of a business

 Liquidity ratios  Profitability ratios  Financial efficiency ratios  Gearing ratios  Shareholders ratios

 Shows the solvency of a business (if it is in a position to repay debts)  Focuses on short term assets and liabilities  Who is interested? Potential investors Suppliers Money lenders Managers

 Current ratio Current assets Current ratio = Current liabilities If the ratio is below 1.5 the business may not have enough working capital

 Acid test ratio (or quick ratio) Current assets - stocks Acid test ratio = Current liabilities A more severe test of liquidity If a business has an acid test ratio of less than 1:1 then its current assets do not cover its current liabilities

 Using WWIC statements can you carry out the liquidity ratios

 Shows how well a business is doing in terms of profit  Focuses on profit, capital employed, turnover  Who is interested? Owners Managers Potential investors Employers Potential investors

 Return on capital employed (ROCE) Net Profit ROCE= x 100 Long-term capital employed Relates profit to the size of the business An important ratio to test profitability

 Gross Profit Margin Gross Profit Gross Profit Margin= x 100 Turnover Also known as a mark-up Higher the better Quicker the turnover, the lower the gross margin needed

 Net Profit Margin Net profit before tax Net Profit Margin= x 100 Turnover Measures how well a business controls its overheads and cost of sales A small difference between the gross margin and the net margin suggests the overheads are low

 Using WWIC statements can you carry out the profitability ratios

(also known as activity or asset utilisation ratios)  Measures how well a business employs its resources  Focuses on profit, capital employed, turnover  Who is interested? Managers The credit control department could be assessed by looking at how quickly debts are collected

 Asset turnover ratio Turnover Asset turnover = Net asset Measures the productivity of assets It looks at how much turnover is generated by the assets employed in a business

 Stock turnover ratio Cost of sales Stock turnover = Average Stock  Measures how quickly a business uses or sells its stock – generally the quicker the better  Calculates how many times during the year a business sells its stock  Businesses can operate on lower profit margins

 Stock turnover ratio Average Stock Stock turnover = x 365 Cost of Sales  Measures how many days it takes to sell the whole stock  Here we generally look for lower figures to indicate high levels of efficiency  It is still an industry dependent ratio.

 Creditor days (creditors’ payment period) Creditors Creditor days= x 365 Cost of sales Measures how quickly a business pays its debts to short term creditors e.g. Suppliers The result is the average number of days it takes to pay debts

 Debtor Days Debtors Debt collection period= x 365 Turnover Measures the efficiency of a business’ credit control system The result is the average number of days it takes to collect debts from customers

 Using WWIC statements can you carry out the financial efficiency ratios

 Shows the long term financial position of a business e.g. relationship between loans on which interest is paid and shareholders’ funds on which dividends may be paid  The owners of a business might prefer to raise extra funds by borrowing rather than from shareholders so they retain control of the business  Dividends do not have to be paid to ordinary shareholders – as a business becomes more highly geared (loans are high relative to shared capital) it is considered more risky by creditors  Who is interested? Creditors

 Gearing ratio Non-current Liabilities Gearing ratio = x 100 Equity + Non-current Liabilities Shows how much money ordinary share holders receive per share

 Using WWIC statements can you carry out the gearing ratio calculation

 Used to analyse the performance of public and private limited companies  Focuses on factors such as earnings and dividends from shares in relation to their price  Who is interested? Owners of limited companies Owners of private limited companies Potential investors

 Dividend per share Dividend Dividend per share= Number of shares Shows how much money ordinary share holders receive per share

 Dividend yield Dividend per share Dividend yield= x 100 share price The dividend per share expressed as a percentage of the current share price

 Ratios provide a good insight into the performance of a business.  Best use of ratios is when you consider other data along side it.  Other data can be previous data from the same business.  Data from another business that is in the same industry.  Even data that is from businesses in different industries, but has similarities.

 It doesn’t take into account the market the business is operating in.  It doesn’t establish the businesses position within the market.  It struggles to really reveal the quality of the workforce and management.  It ignores the economic environment.

In pairs conduct ratio analysis for one of the 5 businesses we have been looking at. You should calculate and analyse the ratios and put into a presentation to be given to the class!!

 Please complete homework 3 of the homework booklet.  Due this time next week