1. Ratio Analysis

2. A method of assessing a firm’s financial situation by comparing two sets of linked data.

3. Comparisons Inter-firm comparisons Intra-firm comparisons
Comparisons to a standard
Comparisons over time

4. Types of ratio Profitability ratios Liquidity ratios Gearing
Financial efficiency ratios
Shareholders ratios

5. Users of ratios Managers Employees Government Competitors Suppliers

6. Liquidity ratios
Measure of a firms ability to meet its day to day expenditure.
Does the firm have sufficient short term assets to cover its short term debts.

7. Current test ratio Current asset ratio = current assets
current liabilities
252 = 1:1.5
219
For every £1 of current liabilities, it has £1.15 current assets

8. Acid test ratio
Acid test ratio = (current assets- inventories)/current liabilities
252-42/219 = 1:0.95
For every £1 of current liabilities, it has only £0.95 current assets excluding inventories.

9. Profitability ratios
Allow for the analysis of a firms profits in relation to either its trading performance or the capital utilised in generating that profit

10. Operating profit margin
Operating profit/sales revenueX100
545/1,390X100 = 39%
For every £1 of sales, 39p is left as profit after expenses have been paid

11. Return on capital employed
ROCE% = operating profit/(total equity and non current liabilities)X100
545/3034X100 = 17.9%
For every £1 capital invested, a profit of 0.179p was generated in that financial year.

12. Financial efficiency ratios
How efficiently are management controlling the financial operation

13. Asset turnover
Measures how efficiently assets are used to generate sales revenue.
Asset turnover = sales/net assets
1,390/1,300 = 1:0.7
For every £1 invested in assets, the business was able to generate sales of 0.43 in one year

14. Inventory/ stock turnover
Inventory turnover = cost of sales/inventory
568/42 = 13.5 times
The business is selling its inventories 13.5 times per year

15. Payables (creditor days)
Payables days = (payables X365 days)/credit purchases
219X365/845 = 94 days
On average the business pays for supplies approximately 3 months after receiving them.

16. Receivables (debtor) days
Receivables days = receivablesX365/revenue
135X365/1390 = 35 days
On average the business can expect to receive payment for their sales 35 days after the sale has taken place.

17. Gearing
Measure of the percentage of a firms capital that is financed by long – term loans.
Gearing ratio% = non-current liabilities/ (total equity + non-current liabilities)X100
1,734/3034 X100 = 57%
For every £1 invested in the business, 57p is from a long-term liability.

18. Shareholders ratios
Measure the value of the return to a shareholder.

19. Dividend per share DPS = total dividends/number of issued shares
300m/450 = 66.7p
For each share owned a shareholder will receive 66.7p.

20. Dividend yield Dividend yield = (dividend per share/market price) X100
If a dividend of £1 was received, the expected value of the share would be £6.50.

21. Limitations
Firms have other objectives
Social audits
reliability

22. Other things to consider
Reliability
Historical bias
Comparisons
Corporate objectives
External factors