Profitability, liquidity, efficiency and gearing ratios, their formulae and interpretation, and the limitations of ratio analysis.
Categories of ratio
| Ratio | Formula | Measures |
|---|---|---|
| Gross profit margin | (Gross profit ÷ revenue) × 100 | profitability of trading |
| Profit margin | (Profit for year ÷ revenue) × 100 | overall profitability |
| Return on capital employed | (Profit ÷ capital employed) × 100 | efficiency of capital use |
| Current ratio | Current assets ÷ current liabilities | short-term liquidity |
| Liquid (acid-test) ratio | (Current assets − inventory) ÷ current liabilities | immediate liquidity |
| Inventory turnover | Cost of sales ÷ average inventory | how fast inventory sells |
| Trade receivables days | (Receivables ÷ credit sales) × 365 | time to collect debts |
| Trade payables days | (Payables ÷ credit purchases) × 365 | time taken to pay |
| Gearing | (Non-current liabilities ÷ capital employed) × 100 | reliance on borrowing |
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