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FDgFDg Managing FinanceManaging FinanceLesson Aims

To learn the common accounting ratios To understand what they mean / how

they can be improved

To analyse accounts by means of the

ratios

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Usersof AccountsUsersof Accounts people whopeople who

read / interpret financialstatementsread / interpret financialstatements

Owners / Investors Lenders / Creditors / Suppliers

Employees

Tax Authorities Customers

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Use of Ratio

s/ Percentage

sUse of Ratio

s/ Percentage

s

Makes it possible to compare one

business with another even if they are

of different size

Makes it possible to compare the

progress / decline of a business over

time by identifying trends

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Analysis

of Accounts

will focus

onAnalysis

of Accounts

will focus

on

Profitability

Liquidity ability to pay debts

Financial Strength e.g. extent to which

business relies on borrowing

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Apply accounting ratios toApply accounting ratios to

Task

1 dodge packagingTa

sk1 dodge pac

kagingPart A dax LtdPart A dax Ltd

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Profitability Percentages

Profitability Percentages

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Return on Capital EmployedReturn on Capital EmployedNet Profit

ShareholdersFunds

= return on capital employedx 100

25000 x 100 = 21.1%25000 x 100 = 21.1%

118300118300

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Gro

ssProfit Margin

Gro

ssProfit Margin

Gross Profit

Sales

= gross profit marginx 100

55000 x 100 = 31.4%55000 x 100 = 31.4%

175000175000

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Net Profit Margin

Net Profit Margin

Net Profit

Sales

= net profit marginx 100

25000 x 100 = 14.3%25000 x 100 = 14.3%

175000175000

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GearingGearing comparesborrowedcomparesborrowed

money with owners capitalmoney with owners capital

BorrowingsCapital

= gearingx 100

29200 x 100 = 24.7%29200 x 100 = 24.7%

118300118300

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High Gearing = a large amount of

borrowing in relation to investment

Low Gearing = a small amount ofborrowing in relation to investment

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Intere

st Cover

Intere

st Cover

Net Profit before interest and tax

Interest payable= interest cover

29000 = 7.3 times interest covered by profit29000 = 7.3 times interest covered by profit

40004000

No figuresgiven for dax but assumeNo figuresgiven for dax but assumeinterest for year was4000interest for year was4000

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Liquidity Ratios / PeriodsLiquidity Ratios / Periods

Liquidity measures the business

ability to meet its debts /

obligations as they become due.

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Current Ratio / Working Capital RatioCurrent Ratio / Wor

king Capital Ratio

current assets

current liabilities

= current ratio

62500 = 2.58 : 162500 = 2.58 : 1

2420024200

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Liquidity Ratio/Quick

Ratio/Acid TestLiquidity Ratio/Quic

kRatio/Acid Te

st

current assets minus stock

current liabilities

= liquidity ratio

17500 = 0.72 : 117500 = 0.72 : 1

2420024200

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Stoc

kTurnover Period

Stoc

kTurnover Period

Average Stock

Cost of Sales

= stock turnover periodx 365

45000 x 365 = 13745000 x 365 = 137

120000120000

daysdays

= how long stock is held= how long stock is held

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Debtor Collection PeriodDebtor Collection PeriodAverage Debtors

Credit Sales

= debtor collection periodx 365

17500 x 365 = 3717500 x 365 = 37

175000175000

daysdays

= average period to collect trade debtors= average period to collect trade debtors

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Creditor Payment PeriodCreditor Payment PeriodAverage Creditors

Credit Purchases

= creditor payment periodx 365

15000 x 365 = 4615000 x 365 = 46

120000120000

days taken to pay creditorsdays taken to pay creditors

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Operating CycleOperating Cycle

Stock Turnover PeriodAdd

Debtor Collection

MinusCreditor Payment

= Operating Cycle

137 Days+

37 Days

-46 Days

= 128 Days

Period of time from paying forsupplies toPeriod of time from paying forsupplies togetting paid forsalesgetting paid forsales