9706 · 1.6.2
Calculation and evaluation of ratios flashcards
Revision flashcards for Cambridge 9706 Calculation and evaluation of ratios (syllabus 1.6.2). Flip, recall, then mark a real past-paper question.
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Gross profit margin?
(Gross profit ÷ Revenue) × 100.
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ROCE?
(PBIT ÷ Capital employed) × 100; CE = equity + long-term liabilities.
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Current ratio?
Current assets ÷ Current liabilities.
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Acid test?
(Current assets − Inventory) ÷ Current liabilities.
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Inventory days?
(Average inventory ÷ COGS) × 365.
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Gearing?
(Non-current liabilities ÷ Capital employed) × 100.
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What does the Return on Capital Employed (ROCE) measure?
It measures the efficiency and profitability of a company's capital investments. It shows how much profit is generated for every £1 of capital employed. Formula: (Profit from Operations / Capital Employed) x 100.
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Why is inventory excluded from the Acid Test (Quick) Ratio calculation?
Inventory is excluded because it is the least liquid of all current assets. It cannot be converted into cash quickly and there is no certainty it can be sold at its book value, especially in a forced sale situation.
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What is the formula for Trade Receivables Turnover in days and what does it indicate?
Formula: (Trade Receivables / Credit Revenue) x 365. It indicates the average number of days it takes for a business to collect payment from its credit customers. A shorter period is generally better for a company's cash flow.
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A company has a high gearing ratio. What does this signify?
It signifies that the company is financed more by long-term debt than by equity. This increases financial risk due to mandatory interest payments, but it can also amplify returns to shareholders if the business is profitable (financial leverage).
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How can a company improve its Gross Profit Margin?
A company can improve its Gross Profit Margin by either increasing its selling prices without a corresponding fall in demand, or by reducing its direct cost of sales, for example, by finding a cheaper supplier or improving production efficiency.