Financial Accounting Ratio Analysis

Financial Accounting Ratio Analysis

  • Submitted By: ramshz
  • Date Submitted: 11/14/2010 7:12 AM
  • Category: Business
  • Words: 1059
  • Page: 5
  • Views: 1090

(a) Ratios.

Profitability Ratios

Return on Capital Employed ( ROCE): It provides information on the return earned by a company on a capital invested by investors. ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

ROCE% = Net ProfitCapital Employed x100

Return on Equity (ROE): The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.  

ROE% = Net Profit Shareholder's Equity X 100

Operating profit : Profit generated by a company's operations before interest payments and tax.

Operating Profit = Operating ProfitNet Sales x 100

Gross profit ratio: The gross profit ratio indicates how much of each sales pound is available to meet expenses and profits after merely paying for the goods that were sold.

Gross Profit Ratio = Gross ProfitSales x 100

Total assets turnover ratio: This ratio is useful to determine the amount of sales that are generated from each pound of assets.

Assets Turnover Ratio= RevenueTotal Assets

Fixed asset turnover ratio: The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

Fixed Asset Turnover = Net SalesNet Property, Plant and Equipment

Efficiency/Management of Working Capital

Average settlement period for trade receivables ratio: An efficiency ratio that measures the average period for which inventories are held by a business.

Average Settlement period for trade receivables = Average Inventory held Cost of Sales x 52 weeks

Stock Holding period ratio: It measures the rate at which stock moves through the...

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