Analysis of accounts

• Capital employed is shareholders’ equity plus non-current liabilities and is the total long-term and permanent capital invested in a business.
• Gearing ratio = (non-current liabilities / total assets) x 100
• Profit margin on sales = gross profit / revenue x 100
• Acid test ratio = current assets excluding stock / current liabilities
• Current ratio = current assets / current liabilities
• Return on capital employed = operating profit / capital employed x 100
• Liquidity is the ability of a business to pay back its short-term debts.
• Profitability is the measurement of the profit made relative to either the value of sales achieved or the capital invested in the business.
• Profitability ratios:

  • Net profit margin (%) = Net profit/revenue × 100
  • Gross profit margin (%) = Gross profit/Revenue × 100
  • Return on capital employed: Net profit × 100 Capital employed
• The concept and importance of liquidity:

  Illiquid means that assets are not easily convertible into cash.

  Liquidity ratios:

  • Current ratio = Current assets/Current liabilities × 100
  • Acid test ratio = Current assets − Inventories/ Current liabilities × 100
• Uses of business accounts:

  
• Ratio Analysis: