Financial Ratios

• Methods of Comparison: Inter firm, Intra firm, Comparisons to standard, Comparisons over time
• Return on capital employed is an important ratio because it compares the operating profit earned with the amount of capital employed
• ROCE (%) = (Operating Profit / Capital Employed) x 100
• Current ratio   = Current Assets : Current Liabilities
• A low current ratio would be below 1

  A high current ratio would be above 2.5
• Gearing Ratio = (Non-Current Liabilities / Non-Current Liabilities + Equity) x 100
• Capital employed     =    Total equity + Non-current liabilities
• Benefits of high gearing:

  Debt finance is always cheaper than equity

  Easy to pay interest if profits / cash flow are strong
• Benefits of low gearing:

  Less risk of defaulting on debts

  Business has the capacity to add debt if required
• Inventory turnover shows how well a company converts inventory into sales

  Inventory Turnover = Costs of Goods Sold/ Average Stock Held
• Receivable days = Receivables / Revenue x 365
• Receivables days ratio

  •The lower the figure the better

  •Shows the number of days it takes to convert receivables into cash
• Payable days    = Payables / COGS x365
• Payable days:

  The higher the figure the better

  Firms will want a high figure, preferably higher than their receivables days
• Big data is large and complex sets of data
• Labour costs per unit = Total labour costs / Number of units produced