1. Ratios and proportions
Chapter M4
Ratios and proportions
Learning Objectives
Calculate ratios and proportions
Calculate and apply profit ratios
Calculate and apply efficiency ratios
Calculate and apply liquidity ratios
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

2. Ratios and proportions
A ratio is a method of comparing two or more numbers or rates.
A proportion represents the relative contribution of a quantity to the whole. A proportion lies between 0 and 1.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

3. Rates
The rate at which an event takes place is often expressed by a ratio.
The rate at which a car uses fuel is expressed as a rate in the form:
number of kilometres : 100 litres
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

4. Profit ratios
Profit ratios express the relationship of profit to some financial quantity (e.g. total assets or sales).
Profit ratios help analyse past results to determine company profitability.
Profitability provides information on investment returns and risk of bankruptcy.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

5. Asset turnover This ratio measures sales to total assets.
Asset utilisation shows the use being made of the assets of the organisation in its operations.
Asset turnover measures the overall effectiveness of the company’s current management.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

6. Efficiency ratios
Company efficiency can be measured by its ability to achieve the maximum return from the lowest level of assets.
Stock turnover—stock control efficiency
Where:
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

7. Efficiency ratios Debtors turnover—efficiency of credit policy.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

8. Liquidity ratios
Liquidity—the ability of a company to pay its immediate debts.
Current-asset ratio
Dependent on how readily stock and accounts receivable can be converted to cash.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

9. Liquidity ratios
Acid-test ratio—excludes the less liquid current assets and less urgent liabilities.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

10. Remarks Other ratios that reveal trends over time:
Debt/equity—tests leverage
Proprietary ratio—indicates long-term financial viability
Return on investment—interest to shareholders
Rate of return—indicates dollar value of profits is less important than return
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher