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    Ratio Analysis

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    AR Sikdar
    ratio analysis

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    Ratio Analysis

    Uploaded by

    AR Sikdar
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    ratio analysis

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    ratio analysis

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    55 views0 pages

    Ratio Analysis

    Uploaded by

    AR Sikdar
    ratio analysis

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    BusinessStudiesOnline:Slide1

    Analysing Business Performance


    Analysing Business Performance
    enders
    Will want to make sure they are going to get their money back
    enders
    Will want to make sure they are going to get their money back
    mployees
    They will want to know their jobs are safe
    mployees
    They will want to know their jobs are safe
    Oncetheaccountshavebeenproducedtheycan
    beusedtoassesstheperformance
    Ofcoursetheownerswillwanttoknowthis,butsowill:
    overnment
    They will want tax revenue and jobs to be created
    overnment
    They will want tax revenue and jobs to be created
    uppliers
    They will want to know if they can rely on more sales
    uppliers
    They will want to know if they can rely on more sales
    BusinessStudiesOnline:Slide2
    Using Ratios
    Using Ratios
    RatioAnalysis
    ProfitabilityRatios LiquidityRatios
    These consider how good the
    profits of the business are.
    There are 3 profitability ratios:
    1) The Gross Profit Margin
    2) The Net Profit Margin
    3) Return on Capital Employed
    (ROCE)
    These consider how well the
    working capital of the business
    has been managed. There are 2
    liquidity ratios:
    1) The Current Ratio
    2) The Acid Test Ratio
    Inordertoanalyseaccountswemustuseratios
    Therearetwotypesofratiosthatwemustuse:
    BusinessStudiesOnline:Slide3
    Profitability Ratios
    Profitability Ratios


    The Gross Profit Margin
    The Gross Profit Margin
    Calculatedusingthefollowingformula:
    Thiscomparesgrossprofitwiththesalesmade
    Thehigherthisfigureisthebetter
    E.g.agrossprofitmarginof56%meansthatforevery
    1ofsales,afirmmakes56pencegrossprofit
    100 x
    Revenue Sales
    Profit Gross
    Margin Profit Gross =
    From
    TPL
    Account
    From
    TPL
    Account
    BusinessStudiesOnline:Slide4
    Profitability Ratios
    Profitability Ratios


    The Net Profit Margin
    The Net Profit Margin
    Calculatedusingthefollowingformula:
    Thiscomparesnetprofitwiththesalesmade
    Thehigherthisfigureisthebetter
    E.g.anetprofitmarginof32%meansthatforevery
    1ofsales,afirmmakes32pencenetprofit
    100 x
    Revenue Sales
    Profit Net
    Margin Profit Net =
    From
    TPL
    Account
    From
    TPL
    Account
    BusinessStudiesOnline:Slide5
    Profitability Ratios
    Profitability Ratios


    The Return on Capital Employed
    The Return on Capital Employed
    Calculatedusingthefollowingformula:
    Thiscomparesnetprofittotheamountof
    moneyinthebusiness
    Thehigherthisfigureisthebetter
    E.g.aROCEof12%meansthatforevery1invested
    inthebusiness,afirmmakes12pencenetprofit
    Thiscanbeusedtocomparetheperformanceofthe
    businesswiththeinterestfromabankaccount
    100 x
    Employed Capital
    Tax Before Profit Net
    (ROCE) Employed Capital on Return =
    From
    Balance
    Sheet
    From TPL
    Account
    BusinessStudiesOnline:Slide6
    Liquidity Ratios
    Liquidity Ratios


    The Current Ratio
    The Current Ratio
    Calculatedusingthefollowingformula:
    Theanswerisshownasaratio
    E.g.acurrentratioof1.56wouldbeshownas:
    1.56:1
    Thismeansthatforevery1abusinessowesithas
    1.56ofassetsthatcanbesoldtopayit
    Theidealisbelievedtobebetween1.5and2
    s Liabilitie Current
    sets CurrentAs
    Ratio Current =
    From
    Balance
    Sheet
    From
    Balance
    Sheet
    BusinessStudiesOnline:Slide7
    Liquidity Ratios
    Liquidity Ratios


    The Acid Test Ratio
    The Acid Test Ratio
    Calculatedusingthefollowingformula:
    Theanswerisshownasaratio
    E.g.anacidtestratioof1.24wouldbemeanthatfor
    every1abusinessowesithas1.24ofassetsthat
    canbesoldveryquicklytopayit.
    Stockisnotincludedbecauseitmaynotbeafinished
    goodreadyforsale
    Theidealisbelievedtobe1
    s Liabilitie Current
    Stock sets CurrentAs
    Ratio Test Acid =
    Both From
    Balance
    Sheet
    From Balance
    Sheet

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