ratios

• ratio analysis

  used to compare an organisation's performance, covers profitability + liquidity + efficiency
• gross profit percentage ratio

  works out the amount of profit from the buying and selling of goods before all other expenses are deducted, ((gross profit)/(sales revenue))100
• how to improve gross profit percentage ratio


  raise the selling price of the product, negotiate deals with cheaper suppliers
• high gross profit percentage ratio

  indicates the business has a prudent buying policy
• profit for the year percentage

  amount of profit made once all expenses are deducted, ((profit for the year)/(sales revenue))100
• how to improve profit for the year percentage

  decrease expenses, increase the gross profit figure
• return on equity employed

  calculates how much money an investor will get back after a period of time, ((profit for the year)/(opening equity))100, helps to see the risk in an investment
• how to improve return on equity employed

  increase sales, reduce expenses
• liquidity ratios

  calculate the organisation’s ability to turn assets into cash to pay debts
• ideal liquidity ratios

  2:1 current assets : current liabilities
• how to improve liquidity ratios

  increase current assets, if ratio is too high you can sell non-current assets, decrease current liabilities
• acid test ratio

  severe test of a firm’s capabilities to meet its debts, formula is the same as liquidity ratio but with stock written off because it assumes that stock is perishable / may go out of date / may go out of fashion or become obsolete
• ideal acid test ratio

  1:1 current assets : current liabilities
• rate of inventory return

  efficiency ratio which determines how quickly a firm goes through its stock, high stock turnover is preferable as this means stock is selling
• how to improve rate of inventory return

  low rate of inventory return is because no one is buying stock, so the quality of goods, customer service, and advertising should be improved
• purpose of ratio analysis

  help with future decision making, compare current performance with previous records, compare a firm’s performance with similar competitors, monitor and identify issues that can be highlighted and resolved
• limitations of ratio analysis

  information used is historic not current, does not take external factors into account, does not measure the human element of a firm, can only be used for comparison with other firms of the same size and type, difficult to compare with other businesses as they may not be willing to share the information