Ratio analysis

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Charles K


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September 14, 2010








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2 / 293


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profit figures. Here are some of the most important ratios used in business: Profit margin ratios: Gross profit % = (Gross profit / Sales) x 100% Operating profit % = (Operating profit / Sales) x 100% Gearing ratio: Gearing ratio = (Preference share debt - cash at bank) / Equity Management ratios: Return on ordinary shareholders funds = (Net profit before tax / Average Equity) x 100% Return on capital employed (ROCE) = (Operating profit / Average capital employed) x 100% Investment ratios: Earnings yield = (Earnings per share / Share Price) x 100% Earnings per share = Net profit (after tax and preference divi) / Number of ordinary shares Price/earnings ratio = Market price of share / Earnings per share Dividend yield = (Dividend per share / Market price of share) x 100% Dividend cover = Net profit / Dividends Interest cover = Profit (before interest and tax) / Intrest payable for year Solvency ratios: Working capital (current ratio) = Current assets / Current Liabilities Acid or quick test ratio = (Current assets - stock) / Current Liabilities Debtor days and creditor days: Debtor days = (Average trade debtors / Credit sales) x 365 days Creditor days = (Average trade creditors / Credit Purchases) x 365 days
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Ratios help us to instantly check whether a business is sound, and also to compare ratios over a period in time. Ratios can be used for the following purposes: 1. Examining trends in results over a number of years. 2. Comparing the results of a business with results of other businesses. 3. Comparing the results of the business with the average results of all businesses in that sector...
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