Financial Ratios

    Financial Ratios & Analysis

    Financial Ratios are best explained using an example. Below are sample financial statements of a business achieving it's target ratios.

    1
     Profit & Loss - Sample Client     Ratios
         
     Sales 1 2,400,000      Double Breakeven
      Less COGS 2   1,440,000        
      Gross Profit 3   960,000       40%
      Overheads 4  120,000      50% of Employment Costs
      Marketing 5  120,000      5% of Sales 
     Employment Costs 6     240,000      25% of Gross Profit 
     Total Overheads 7 480,000    
      Net Profit 8  480,000       20% of Sales 
         
      Balance Sheet - Sample Client  
         
     Inventory 9  250,000   
     Trade Debtors 10  300,000   
     Trade Creditors 11  ( 150,000)  
      Working Capital 12   400,000      
     Fixed Assets 13   350,000    
      Total Capital 14   750,000   
         
     Total Debt 15  300,000       40% Debt to Capital
     Total Equity 16  450,000        67% Debt to Equity
      Total Funding 17 750,000    
    Gross Profit Margin  A measure of the proportion of revenue that is left after deducting all costs directly related to the sales.  
      Gross Profit 3 / Revenue 1    [$960,000 / $2,400,000 = 40%]
       
    Net Profit Margin A measure of the proportion of revenue that is left after deducting all operating expenses.
      Operating Profit 8 / Revenue 1
       
    Return on Capital Employed                     A measure of the efficiency and profitability of capital investment (ie. funds provided by shareholders & lenders).
    ROCE monitors the relationship between the capital ('inputs') used by the business and the earnings ('outputs') generated by the business.
      Annualised EBIT 8 / Total Invested Capital 14
       
    Debt to Capital The debt-to-capital ratio is calculated by taking the company's debt, including both short- and long-term liabilities and dividing it by the total capital.
    Total capital is all debt plus shareholders' equity, which may include items such as common stock, preferred stock and minority interest.
    Total Debt 15 / (Total Debt 15 + Total Equity 16 )
       
    Working Capital Absorption A measure of the adequacy of working capital to support sales activity. This measure indicates the investment made in working capital for each unit of revenue.
      (Trade Debtors 10 + Inventory 9 + WIP - Trade Creditors 11 ) / Annualised Revenue 1
       
    Return on Equity A measure of how effectviely the business has used resources provided by its owners to generate profits.
      (Annualised Net Income 8 / Opening Total Equity 16 )
       
    Current Ratio A measure of liquidity. This compares total currents assets against total current liabilities.
        (Total Current Assets 9+10 / Total Current Liabilities 11 )
       
    Quick Ratio Measures the availability of assets which can quickly be converted into cash to cover current liabilities.
        (Cash Equivalents  + Trade Debtors 10 )/Total Current Liabilities 11 )
       
    Activity Ratio A measure of the efficiency in which the business manages its resources or assets.
      Annualised Revenue 1 / Total Invested Capital 14
       
    Accounts Payable Days A measure of how long it takes for the business to pay it's creditors.
      Trade Creditors 11 x Period Length / Total Costs of Sales 2
       
    Accounts Receivable Days A measure of how long it takes for the business to collect the amounts due from customers.
      Trade Debtors 10 x Period Length / Revenue 1
       
    Inventory Days A measure of how efficiently the business converts inventory into sales.
      Inventory 9 x Period Length / Total Cost of Sales 2
       
    Cash Conversion Cycle A measure of the length of time between purchase of raw materials and the collection of accounts from customers.
      (Inventory Days + AR Days + WIP Days - AP Days)
       
    Debt to Equity A measure of the proportion of funds that have either been invested by the owners (equity) or borrowed (debt) and used by the business to finance its assets. 
      Total Debt 15 / Total Equity 16
       
    Labour Productivity A measure of staff performance & efficiency against business output. 
      Gross Profit 3 / Employment Costs (Wages + Super + Payroll Tax + Workcover) 6
       
    Economic Profit A measure of profit against cost of capital; where a positive economic profit represents the creation of value for shareholders.
    Net Operating Profit After Tax - (Weighted Average Cost of Capital x Total Invested Capital 14 )
       
    Break Even Point A measure to determine the amount of revenue or units that must be sold to cover fixed and variable costs associated with making those sales.
    In Units   : Fixed Costs / Contribution Margin per Unit 
    In Dollars: Sales Price per Unit x Break Even Point in Units
       
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