Ratio Analysis

1. Values published are absolute figures
2. Difficult to compare different sized businesses
3. Need to compare
   1. Info from a ratio on its own is v.limited
   2. Past Periods
   3. Similar businesses
   4. Objectives/targets

1. Profitability
2. Liquidity
3. Efficiency
4. Debt
5. Investors

Nota:

• Gross Profit = Revenue-Cost of sales

1. Gross Profit/Revenue X 100
2. Relationship between revenue and direct costs
3. % of each £ left after the business has paid for its materials, labour etc
4. The higher the better
5. Important to competitiors

1. Comes from: investors putting in capital, receipts from sales, sales of non-current assets, banks agreeing to loans and overdrafts
2. critical balance between inflows and outflows
3. Big profit doesn't necessarily mean the business is doing well
   1. e.g.overtrading

      Nota:

      • This is when a business invests too much in non-current assets(often during rapid expansion) and not enough is kept for day-to-day trading and emergencies. 
4. liquidity

   Nota:

   • Good=business has lots of cash/near cash assets compared to bills
   1. working capital=current assets-current liabilities

1. Amount added to the cost of sales to give the selling price

1. profit from operations/revenue X 100
2. Profit before finance and tax deducted
3. Represents pure profits earned on each £ of revenue after expenses

1. Rate at which the business is earning profit relative to the money invested-relates earnings to the level of investment in the business
2. Profit from operations/capital employed

   Nota:

   • Capital employed= shareholder's funds + long term liabilities
3. reflects the financial risk
4. gives shareholders a % to compare to the interest rates

1. revenue/capital employed X 100
2. link between investment + income and ultimate profit
3. Indicates the efficiency of the business' use of its assets to generate revenue.
4. great interest to management
5. Higher the better but too high >overtrading

1. profit after tax/number of ordinary shares

   Nota:

   • profit after tax=all costs deducted
2. fundamental measure of share performance
3. Assesses potential-relates available profit for distribution to number of shares
   1. trends created
4. less shares=more per share
5. Business may buy bad shares-lots of shares issued-profits diluted

1. must combine with other areas
2. accuracy depends on reliability of data
3. Differing accountig policies
4. Ratios tell us what has happened but not why
5. Don't analyse aspects without numbers attached e.g. morale/goodwill