1. Select one of the following
Finanancial Ratios
Select one of the following
PROFITABILITY
EFFICIENCY
SOLVENCY
LIQUIDITY

3. PROFITABILITY Gross Profit Ratio GP/Revenue(sales)
Whats a Good Figure?
Depends on the nature of the business but generally
50% is quite good
20-50% is acceptable
Really only relevant to businesses in manufacturing and retail as services have no Costs of Goods Sold
How Can it be Improved?
Look at reducing costs charged by suppliers (decrease COGS)
Increase the price your business charges
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4. PROFITABILITY How can it be improved Net Profit Ratio
NP/Revenue(sales)
Whats a Good Figure
The higher the better but generally a figure over 15%
How can it be improved
Reduce expenses
Increase price (but this really runs down from the GP Ratio anyway, so only use this if you are desperate)
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5. PROFITABILITY Return on Owner’s Equity Owner’s Equity $
Net Profit/Owners Capital
Remember this is used to determine how well the owner’s have used their funds
Therefore it is more accurate to use the owner’s capital contribution only NOT the total owners equity figure
Owner’s Equity $
Shareholder’s capital
Retained Earnings(Profit)
Use this
Whats a Good Figure?
Generally accepted minimum return is 12-16%
Over 20% is excellent
Remember that you can get 5-6% just by putting your money into a
Bank.
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6. Liquidity Current Ratio (also called the working capital ratio)
Current Assets / Current Liabilities
Used to determine whether a business has enough liquidity in the form of its current assets to pay short term debt
What is a Good Figure?
Around 1.5 to 2 : 1
Why not 1:1? Because not all of your current assets are held in CASH
You need to look at your makeup of current assets
If a lot of it is made up of stock then it takes a bit longer to convert it to cash, you need a slightly higher ratio
How Can it Be Improved
Better Working Capital management
Sell and Lease Back
Factoring
Leases for new equipment

7. Solvency Gearing or Debt to Equity Ratio Two Methods
Total Liabilties/Owner’s Capital - this is the preferred option because it doesn’t jump to the conclusion that a business can meet its current repayments
Non Current Liabilities / Total Equity – This is in SYKES and is wrong for the above reasons but both will be marked correct in the HSC
Keep it simple – REMEMBER TO NEVER USE RETAINED EARNINGS/PROFITS IN ANY RATIO
What is a good figure?
0.5:1 up to 1:1 is OK anything over 1:1 is getting very highly geared.
What can be Done to improve Gearing
Reduce Debt (this is preferrable) or Raise Owner’s Equity

8. The End