Profitability Ratios, Liquidity Ratio and Account Principles.
Profitability Ratios
Return on Capital Employed (ROCE) or Return on Equity (ROE)
Numerator – the net profit or income, usually taken before tax.
Capital Employed or Shareholders Equity -
Designed to indicate the effective use of the shareholders capital in the business with respect ot the net profits that they have generated over the period of concern.
Net Profit/Income Percentage or Return on Sales
Helps to identify the impact of administrative, selling and distribution costs on profit, when compared with the gross profit percentage.
Liquidity Ratios
Current Ratio (Working Capital Ratio)
Usually expressed in terms of ratio of, say, 2:1 or 2 to 1 where the current assets equal twice the liabilities. This shows the number of times that the short term assets can be quickly turned into cash, to meet any short term requirements.
Acid Test (Liquid Ratio)
Measures the immediate ability to pay short term creditors, as inventory is not always available for short term sale. A 1:1 is often a reasonable guide.
Inventory Turnover Ratio
Records how much inventory is tied up in relation to its usage by showing how often it is turned over in a trading period. It is a measure of how effectively inventory is utilised and the extent that resources in the business are being tied up.
Average Period of Credit Given (Debtors Collection Period)
Average Period of Credit Received/Taken (Creditors Collection Period)
Accounting Principles and Concepts
Business Entity - the business is seen as a separate entity from its owner(s).
Going Concern – this concept assumes that the entity will continue to operate in the foreseeable future, unless there is a clear evidence to the contrary. The balance sheet and profit and loss account on the basis that the assets will not be liquidated but have a continuing value to the business.
Periodicity – the final accounts of the company, i.e. income statements (profit and loss account), balance sheet and, for
Return on Capital Employed (ROCE) or Return on Equity (ROE)
Numerator – the net profit or income, usually taken before tax.
Capital Employed or Shareholders Equity -
Designed to indicate the effective use of the shareholders capital in the business with respect ot the net profits that they have generated over the period of concern.
Net Profit/Income Percentage or Return on Sales
Helps to identify the impact of administrative, selling and distribution costs on profit, when compared with the gross profit percentage.
Liquidity Ratios
Current Ratio (Working Capital Ratio)
Usually expressed in terms of ratio of, say, 2:1 or 2 to 1 where the current assets equal twice the liabilities. This shows the number of times that the short term assets can be quickly turned into cash, to meet any short term requirements.
Acid Test (Liquid Ratio)
Measures the immediate ability to pay short term creditors, as inventory is not always available for short term sale. A 1:1 is often a reasonable guide.
Inventory Turnover Ratio
Records how much inventory is tied up in relation to its usage by showing how often it is turned over in a trading period. It is a measure of how effectively inventory is utilised and the extent that resources in the business are being tied up.
Average Period of Credit Given (Debtors Collection Period)
Average Period of Credit Received/Taken (Creditors Collection Period)
Accounting Principles and Concepts
Business Entity - the business is seen as a separate entity from its owner(s).
Going Concern – this concept assumes that the entity will continue to operate in the foreseeable future, unless there is a clear evidence to the contrary. The balance sheet and profit and loss account on the basis that the assets will not be liquidated but have a continuing value to the business.
Periodicity – the final accounts of the company, i.e. income statements (profit and loss account), balance sheet and, for