1. Ratio Analysis - Overview

2. Learners should be able to:
Calculate and interpret liquidity ratios: current ratio and acid test [AS]
Calculate and interpret solvency ratios: gearing and interest cover
Calculate and interpret efficiency ratios: creditor turnover, debtor turnover, non-current assets turnover, and stock turnover
Calculate and interpret profitability ratios: gross profit margin, net profit margin, return on capital employed (ROCE) and return on equity [AS]
Calculate and interpret shareholder ratios: dividend per share, dividend yield, earnings per share and price/earnings ratio
Evaluate the financial position of a business
Evaluate the usefulness of ratio analysis to a business and its stakeholders

3. What is Ratio Analysis?
Ratio analysis involves the comparison of financial data to gain insight into business performance
Compare against:
Previous years
Competitors (inter-firm)
Industry average

4. It helps answer questions such as:
Why is one business more / less profitable than another?
What returns are being earned by shareholders in a business?
Is the business solvent?
Can it repay its debts as they fall due?
How effectively is it using its assets?

5. Information comes from:
Income Statement
Balance Sheet
(Statement of Financial Provision)
Revenue
Cost of Sales
Gross profit
Operating profit
Net profit
Current assets
Current liabilities
Inventories
Trade receivables and payables
Long-term liabilities
Capital and reserves

6. Key stages in ratio analysis:
Gather Data
Calculate Ratios
Interpret Results
Take Action

7. Main Groups of Ratios & Stakeholder Interest
PROFITABILITY
Measures returns on trading & investment
Shareholders
Government
Competitors
Employees
LIQUIDITY
Can firm pay debts on time?
Lenders
Suppliers
FINANCIAL EFFICIENCY
Effectiveness of managing finances
SOLVENCY /RISK
Has the business taken on too much / little debt?
SHAREHOLDERS
Is it worth investing in the firm?