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LIQUIDITY RATIO:
Current assets
a) Current Ratio= X :1
Current liability
Inventory is excluded from the ratio because inventory is not a very liquid current
asset.
Some manufacturing companies hold large quantities of raw material stocks.
Finished goods might be warehoused for a long time, or sold on lengthy credit. In
such businesses stocks are not very liquid assets.
If Current ratio is higher than Quick ratio, it means working capital is tied up in
inventory. If quick ratio is comparatively very low, it indicates a lot of working capital
tied up in stock and may encounter cash flow problems.
General standard is 1:1. In excess of 1:1 indicates over-investment in working capital.
Liquidity ration: Current ratio and Quick ratio are below industry average:
Poor level of liquidity.
Utilizing liquid resources to finance fixed investments?
Utilizing liquid resources to repay past borrowings?
Industry growing too fast ignoring liquidity?
Improve liquidity through disposing surplus assets and/or reducing stock level and/or
speeding up debtors’ collection period and/or slowing payments to creditors.
PROFITABILITY RATIO:
PBIT
c) Return On Capital Employed (ROCE) = 100% X%
Capital Employed
This ratio indicates how efficiently a business is using the funds available (equity and
long-term debt). It measures how much is earned per $1 invested.
It is thus a measures of the efficiency and effectiveness with which the managers
have made use of the resources available to them.
mezbah.ahmed@hotmail.co.uk
http://groups.yahoo.com/group/acca_bd/
1
Ratio analysis
ROCE uses profit which is not directly linked to the objective of maximizing
shareholders wealth.
If increase from previous year or above industry average: good sign and reflects the
fact that the company has managed to increase sales without a proportionate
increase in costs.
If decrease from previous year or below industry average: problem with control of
costs. Level of dividend has also fallen.
Turnover ( Sales )
e) Asset turnover ratio = X :1
Capital employed
This shows the turnover that is generated from each $1 worth of asset employed.
The higher the turnover per $1 invested the more efficient use of the assets
employed.
Nrt profit
f) Net profit margin = 100% X %
Sales
Higher percentage indicates: costs are being controlled; sales prices are high
compared to costs
Gross profit
g) Gross profit percentage = 100% X %
Sales
High: Effective purchasing strategy. Concentrating on low volume, high margin sales
Low: selling its products cheaply in order to generate more sales.
Operating profit
h) Operating profit percentage = 100% 100%
Sales
mezbah.ahmed@hotmail.co.uk
http://groups.yahoo.com/group/acca_bd/
2
Ratio analysis
EFFICIENCY RATIO:
Trade Receivable s
a) Receivables Collection Period= 365 days XX days
Credit sales
Avg. Inventory
b) Stock / Inventory Turnover Period= 365 days XX days
Cost of Sales
Cost of sales
Or, = X times
Avg. inventory
Trade Payable
c) Payable Payment Period= 365 days XX days
Credit Purchase
INVESTMENT RATIO:
Total debts
a) Debt / Equity Ratio= *100% X %
Total assets
PBIT
d) Interest Cover = X times
Interest charges
mezbah.ahmed@hotmail.co.uk
http://groups.yahoo.com/group/acca_bd/
4
Ratio analysis
T 10
Raw material
a) Raw material stock turnover / holding period = * 365
Cost of purchase
F9: FM:
Long term debt Pr eference share capital
Financial gearing = X 100%
Ordinary share capital and reserves
Long term debt Pr eference share capital
= X 100%
Share capital Re serves Long term debt
Pr ofit before int erest
= X 100%
Pr ofit after int erest
Fixed cos ts
Operational gearing = X 100%
Total cos ts
Fixed cos ts
= X 100%
Variable cos ts
Contributi on
= X 100%
PBIT
mezbah.ahmed@hotmail.co.uk
http://groups.yahoo.com/group/acca_bd/
5