RATIO ANALYSIS
Profitability ratios - a measure of how much profit its activities generate.
Gross Profit: Total Revenue – Variable (Direct) Costs
Gross Profit
Gross Profit Margin = -------------- x
100 Turnover
 Narrow margins – tend to be on products/services which are high volume, mass
market products which are highly competitive. Such as fmcgsˇ, retail stores.
 Wide margins – tend to be on products/services that are Iow voIume, high
vaIue with reIativeIy high degree of monopoIy power. More frequent in the
services sectors.
 Can increase by increasing turnover relative to cost of sales like
increasing prices.
2. Net Profit: Total revenue – Total Costs (VC+FC)
Net Profit before int and tax.
Net Profit Margin =
x 100Turnover
Retained Profit
----
------------------------
3. Retained Profit Margin = ------------------- x 100 Turnover
● Efficiency Ratios- shows how well the business has performed
● Shows how effective the firm is in using its capital to generate profit
1. Return on Capital Employed (ROCE)
Profit for the Year before int and tax
ROCE = -----------------------------------
x
100
Capital employed
2. Stock Turnover
Cost of goods sold
Stock Turnover = ----------------------------------Closing stock OR
Closing Stock
Stock Turnover = -----------------------------------
x
365
Cost of goods sold
● Liquidity Ratios: Ease of the form to convert assets into cash. Also ability to meet its debts.
1. The Current Ratio – the proportion of assets to liabilities.
Current Assets: Current Liabilities
 A current ratio of 2:1 means the firm has sufficient Iiquidity to cover its IiabiIities
twice over.
 A current ratio of 0.75:1 would suggest that the firm is unable to meet its liabilities. It is
in a weak financial position.
 Too high – Might suggest that too much of its assets are tied up in
unproductive activities. For eg. too much stock.
2. Acid Test Ratio = (Current Assets - Stocks) : Current Liabilities

The Acid Test Ratio gives an indication whether a firm can meet its
IiabiIities without having to dispose of its stocks.

Gives a clear and quick indication of the state of the firmˇs liquid assets.
Comparing the Current ratio and the Acid Test ratio provides indication
of the stock holdings of a firm.
● Shareholderˇs Ratios: a measure of the performance of the business by the view of the
shareholders.
1. Earnings per share=
Profit available after tax
Number of equity shares
The average profit earned per ordinary share
2. Dividends per share= Net profit after interest and tax
No. of shares issued
The average dividend received per ordinary share
3. Dividend Yield: Dividend per share x 100
Market Price
●
Gearing Ratio: Loan Capital
x100
Capital Employed
 Less than 50% shows that most of the capital is provided by the company itself.
 High geared means there is too much borrowing and the firm is at risk.

Can reduce long-term borrowing relative to capital for better gearing ratio.