RATIO ANALYSIS

Enes M. Erciyes

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.

BALANCE SHEET

PROFIT AND LOSS ACCOUNTS

RATIO ANALYSIS

Inferring results by looking at balance sheet and profit-loss accounts is possible. Profitability Ratios Liquidity Ratios Gearing Ratios Shareholders’ Ratios

2008 2007

$000 $000

Turnover 23,500 18,400

Costs of Sales 12,500 10,100

Gross Profit 11,000 8,300

Net Profit 4,600 3,200

Current Assets 13,600 11,900

Stocks 4,900 5,000

Current Liabilities 8,700 7,800

Capital Employed 20,000 18,000

PROFITABILITY RATIOS Gross Profit Margin Net Profit Margin Return on Capital Employed Return on Assets Return on Equity

Gross Profit Margin Revealing the proportion of money left

over from revenues after accounting for the cost of goods sold, GPM assesses a company’s health.

Gross Profit Margin = x 100

Net Profit Margin Profit margin reveals the division of net

profit by the net sales. Its benefit is that it shows how well a

business manages its costs of sales and overheads

A company which has %20 profit margin means that for every 1$ turnover, this company gains 0.20$.

Profit Margin =

x 100

Return of Capital Employed (ROCE) ROCE compares the profit and the

amount of money invested. Its benefit is that it relates the profit to

the company’s size

ROCE = x 100

Liquidity Ratios Acid Test Ratio Current Ratio Quick Ratio Working Capital Ratio Times Interest Earned Ratio

Current Ratio It focuses on current assets and

liabilities.

Current Ratio =

A business is said to have enough liquid resources if current ratio is between 1,5 and 2. If it’s more than 2, it is suggested that too much money is unproductive.

Acid Test Ratio It is a more severe test of liquidity. Because it doesn’t involve stocks in

assets.

Acid Test Ratio =

If acid test ratio is less than 1, it might be a problem. However, this ratio may vary according to sector.

Gearing Ratio This ratio measures the proportion of

borrowed funds to its equity.

Gearing Ratio :

Shareholders’ Ratio It measures how much will shareholders

pay for the debts.

Shareholders’ Ratio =