lecture on ratios

8/7/2019 Lecture on Ratios

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www.bradford.ac.uk/management

APPLIED STRATEGICMANAGEMENTMAN0209MSemester 2: 2010/11(Supplementary Lecture)

Financial RatiosHiggin Lecture Theatre


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This is a supplementary lecture that I

have put together to help students to

undertake the assessment of the

company performance in terms of

efficiency, profitability and returns to

investors.

This lecture is not part of the advertised

course content.


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1

2

4

By the end of this session you will be able to

calculate the following financial ratios


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Ratios What are they?

1.Profitability

1.Liquidity

1.Gearing

1.Investment


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ROCE Return On Capital Employed

The long term capital is found by taking the

shareholders equity plus long term borrowings.

This ratio represents the return that the total

investment into the business is generating.


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Gross Margin

Gross margin indicates the profitability of the

products sold before any other general costs of thebusiness have been considered.

It can be expressed as the number of pence of

gross profit in each pound of sales, or as a

percentage.


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Net Profit

Net Profit = Profit before tax x 100%

Sales

The net profit to sales ratio focuses on profit, after all expenses of the business

compared to sales.


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LIQUIDITY RATIOS

Indicates the amount of cover for the short-term liabilities.

Ideal ratio here should be 2:1

Should never be 1:1


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Quick Ratio

Shows how well the short term liabilities are covered by cash or near cash

assets.

Particularly useful secondary calculation if the business happens to be one

where it can be one where it can take quite a long time to turn the stocks intocash ,

E.g. construction industry.


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Debtor Turnover

Measures the average speed of the customer payments.

In general the higher this ratio the better, as this means

that there is only a small proportion of sales made thathave not yet been paid for.


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Credit Turnover

This ratio indicates the average speed of payments to suppliers.


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INVESTMENT RATIOS

This group of ratios is of the most

interest to current and prospective

shareholders and their advisers andalso by implication , the management

of the company, who will be concerned

about the impression that is beinggiven to these important group of

users.


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Earnings Per Share (EPS)

This ratio is a good measure of general profitability for

shareholders.

It gives them an idea of the maximum pay out that the

company could give them in dividends if it did not retain

any profits within the business.


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Dividend Per Share

This ratio is the immediate cash return to shareholders, that is how much

dividend each share is entitled to for that accounting period.

This is almost always lower than EPS figure.


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Dividend Yield

This ratio indicates the immediate rate of return for

investment in the shares of the firms as it relates,

the dividend which will be received to the price that

would have to be paid to buy the share.

Generally, the higher this figure is, the less

confident the market is in these shares. Since theprice that people are willing to pay bears a close

relation to the amount they think they will reliably get

back.


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Price/ Earnings Ratio

This ratio measures how the stock market rates

the company and indicates whether shares are

relatively expensive or cheap.

The higher this ratio the better, as people will be

willing to pay a high multiple of earnings if they

think that a share is going to perform reliably andwell in the future.


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END

OFLECTURE

lecture on ratios

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