This website uses cookies to ensure you have the best experience. Learn more

Classification Of Ratios Essay

1261 words - 6 pages

Classification of ratios

Activity Ratios

Activity ratios investigate the ways in which various resources of the business are managed.:

1. Inventory (stock) turnover period measures the average length of time items are held in inventory (stock) before being sold.
Means : The average time in days stock is being kept for.
Whats Hot : The shorter time, the better.

Inventory turnover period = Inventories x 365
Cost of sales

2. Settlement period for trade receivables (debtors) measures how long on average customers take to pay the amounts they owe. Companies will usually try to minimise the amount tied up in trade.
Means : How quickly an average debtor ...view middle of the document...

Revenue per employee measures of the productivity of the workforce. We can hear discussions of national rates of productivity per employee and per hour worked.
Means : How efficient are the employees
Whats Hot : The higher the better, effective use of resources

Revenue per employee = Revenue
Number of employees

Liquidity Ratios

Liquidity ratios are concerned with the company’s ability to meet its short-term financial obligations.

1. The current ratio estimates how liquid is the business. A higher current ratio may be thought to be preferable to a lower one, but if a business has a very high ratio, it may mean that funds are tied up in cash rather than being used more productively. You may come across the idea that there is an “ideal” current ratio of around 2 times.
Means : There are sufficient current assets to cover current liabilities as they fall due
Whats Hot : 2:1 is quoted as good, but depends on type of business

Current ratio = Current Assets
Current Liabilities

2. The acid test ratio is similar, but it represents a stricter test of liquidity. For many businesses, inventories (stock) cannot be converted quickly into cash. It may therefore be better to exclude this asset from the measure of liquidity.
Means : Coverage of current liabilities by “liquid” assets
Whats Hot : 1:1 is quoted as good, but again depends on business type.

Acid test ratio = Current assets – stock
Current liabilities

Financing Ratios

1) The interest cover ratio measures the risk for a company not to pay the interest due to banks, government and shareholders
Means : Amount of profit available to cover interest payments
Whats Hot : the higher, the more funds available to meet interest payments

Interest cover = PBIT We can also use the PBITDA
Interest payable
2) The debt to equity ratios = the gearing or the leverage, measures the contribution of long-term debt to the long-term capital structure of the business. Determine as a percentage
Means : Contribution of long-term lenders to the long-term capital structure
Whats Hot : not too high (ie not beyond c30%)

Total debt/equity = Long-term liabilities = Long term debt +short term debt
Shareholders’ funds Shareholders’ funds

Profitability Ratios

Profitability ratios measure the wealth created by the business (expressed as percentages).

1. The gross profit margin measures the profitability of buying and selling goods or services before any other expenses are taken into account
Means : Difference between sales and cost of sales and therefore profitability in buying or producing and selling goods.
Whats Hot : Hot if rising or stable, not good if going down.

Gross profit margin = Gross profit
Revenue (Sales)

2. The operating profit margin represents the profitability of the trading operations of the business. It is the...

Other Essays Like Classification of Ratios

Personal Finance Essay

1698 words - 7 pages accessible website, in whole or in part. Liquidity Ratios • Measures ability to pay current debts with existing liquid assets • “Current” = payment within one year © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income & Expense Statement Ratios Savings Ratio • Shows percentage of after-tax income saved during a time period © 2012

Financing Lease Essay

1208 words - 5 pages Statement of Financial Accounting Standards No. 13 (FAS 13) for more details of classification and accounting. Special Case: Finance Leases under UCC Article 2A The term sometimes means a special case of lease defined by Article 2A of the Uniform Commercial Code (specifically, Sec. 2A-103(1) (g)). Such a finance lease recognizes that some lessors are financial institutions or other business organizations that lease the goods in question purely as

Polluter Case

1253 words - 6 pages will be classified in the statement of cash flows on December 31, 2010. This is an important question to answer because it will have a significant effect on the company’s financial ratios and each section of the statement of cash flows. After reviewing the content of the statement of cash flow, it is apparent that the transactions need to be classified as an operating, investing, or financial activity. In order to do a quality financial analysis of

Literature Review of Xbrl

5528 words - 23 pages researches of XBRL from 6 aspects: the production bases of XBRL, the effect of XBRL, the classification criteria formulation of XBRL, the auditing assurance of financial reports based on XBRL, the implementation of XBRL in different countries and some researches about XBRL in China, which reflects the current status of research about XBRL relatively fully. ------------------------------------------------- Keywords: XBRL, Auditing assurance

Financial Analysis Project

1991 words - 8 pages specialty coffee in the world, operating in 65 countries. The main objective of Starbucks is to maintain its’ standings as the most recognized and respected brands in the world. In efforts to make sure Starbucks stays on the rack track it is imperative to perform the liquidity, solvency, and profitability ratios to see how they are performing whether it is good or bad and it also keeps the informed on how they are doing oppose to their competitors

Auditing Chapter 6

1224 words - 5 pages objectives are determined by the auditor for each general transaction-related audit objective. This process is done for every transaction to help the auditor know what amount of evidence is needed for that cycle to satisfy the general transaction related audit objectives. B. For each specific transaction related audit objective, identify the appropriate management assertions 1. Occurrence-a 2. Completeness-d 3. Accuracy-c,b 4. Classification-e

Dell Case Analysis

4544 words - 19 pages Retention Status- Grade 4............................................................................................................... 14 2. Table 2: Classification of Cases by Retention Prediction Model- Grade 4................ 16 3. Table 3: Odds Ratios and Percent Increase in Probability of Retention- Grade 4...... 17 4. Table 4: Summary of Multiple Regression Analysis of Variables Related to Retention Status- Grade 5

Porter Five Analysis

5593 words - 23 pages Asset Turnover Leverage ROE 20.5% 0.75 2.18 33.8% 20.4% 19.8% 0.82 0.78 2.29 2.31 38.2% 35.7% ATIO ANALYSIS Profitability Ratios McDonald’s is leading the industry with regards to profit margins. It went slightly down in 2012 because of the slight increase in tax expenses from 2011 to 2012. The company is slightly below than competitors with regards to gross margins because McDonald’s has been focusing on quality and this

Managing Finance

5794 words - 24 pages . Identify and explain the various ways by which cost can be classified discussion the value of costs classification including any weaknesses in your argument In the world of business there are a range of costing methods are actually used by the enterprises in evaluation and the analyzing the cost of production when contrasted with the value of other substitutes. In executing the cost, two principle methods are used. Cost analyses deals with

Accounting 101

843 words - 4 pages influences the strategies firms will employ. Value chain analysis For pharmaceutical companies • Research to discover drugs • Approval of drugs by government regulators • Manufacture of drugs • Creation of demand for drugs • Distribution to consumers Porter’s 5 forces classification framework Horizontal Competition • Rivalry among existing firms o Industries characterised by concentrated rivalry and diffuse rivalry o Greater the

Just for Feet

1225 words - 5 pages account balances and presentations and disclosures. Notably, inventory valuation, which increased from 35.47% of total assets in 1996 to 58.01% in 1998, and the accuracy and allocation of vendor allowances were marked as the highest risk areas. With FEET's use of creative accounting, accuracy and classification of transactions/events must be monitored as well. While the calculation of store opening costs fluctuated, store operating costs saw a

Related Papers

Ratio Analysis

1640 words - 7 pages analysis, relevant from the View point of management is that it throws light on the degree efficiency in the various activity ratios measures this kind of operational efficiency. Classification of ratios: Different ratios are used for different purpose these ratios can be grouped into various classes according to the financial activity. Ratios are classified into four broad categories. 1. Liquidity Ratio 2. Leverage Ratio 3. Profitability Ratio 4

Notifiable Transaction Essay

540 words - 3 pages ): non-exhaustive • Acquisition or disposal of assets • Finance leases • Operating leases having significant impact • Providing financial assistance • Formation of joint venture Classification of NT • See R14.06 • Share transaction • Discloseable transaction • Major transaction • Very substantial disposal (VSD) • Very substantial acquisition (VSA) • Reverse takeover (RTO) 5

Financial Data Essay

2454 words - 10 pages 35,578 APPENDIX ASSESSMENT CRITERIA % Degree classification Marking criteria 70 + A3-A1 First class All criteria met to a high standard, full analysis of financial information and accurate interpretation. Excellent understanding of appropriate theory and application of relevant techniques. Excellent standard of English and presentation. Full demonstration of the process of analysing the case study. 60

Can Adequate Nurse Staffing Improve Patient Outcomes?

2956 words - 12 pages improve health and prevent complications. The level of safety of hospitalized patients and the degree of quality care that they receive has more to do than fixed nurse-to-patient ratios. It has been well established in the literature that when nursing workload increase to unmanageable levels; weather it be from the addition of patients, increases in acuity and/or care complexity, or from high levels of fluctuation in patient turnover, that nurses