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Ratio Revision

Ratio Revision. This presentation will help me for revision of different ratios. What I will cover:. Different types of ratios & their Formulas. What does the Syllabus want us to know?. Different types of Ratios. Gross Profit Ratio Net Profit Ratio ROCE ratios (Return On Capital Employed)

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Ratio Revision

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  1. Ratio Revision This presentation will help me for revision of different ratios. Viraj Chokshi Year 11 Ratios

  2. What I will cover: Different types of ratios & their Formulas. Viraj Chokshi Year 11 Ratios

  3. What does the Syllabus want us to know? Viraj Chokshi Year 11 Ratios

  4. Different types of Ratios • Gross Profit Ratio • Net Profit Ratio • ROCE ratios (Return On Capital Employed) • Current Ratio • Acid-test ratio • Overheads ratios • Gearing • Markup Viraj Chokshi Year 11 Ratios

  5. Gross Profit Ratio • Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. • Gross Profit= Sales – Cost of goods sold • Gross Profit= Sales – [Opening Stock + Purchases – Closing Stock] • [Gross Profit Ratio = (Gross profit / Net sales) × 100] Viraj Chokshi Year 11 Ratios

  6. Example • Total sales = $520,000; Sales returns = $ 20,000; Cost of goods sold $400,000 Required: Calculate gross profit ratio. • Gross profit = [(520,000 – 20,000) – 400,000] •  = 100,000 • Gross Profit Ratio = (100,000 / 500,000) × 100 • = 20% Viraj Chokshi Year 11 Ratios

  7. Net Profit Ratio • Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage. • Net Profit= Gross Profit – Overheads • Net Profit Ratio= (Net Profit/Sales) x 100 Viraj Chokshi Year 11 Ratios

  8. Example • Total sales = $520,000; Sales returns = $ 20,000;  Net profit $40,000 • Calculate net profit ratio. • Net sales = (520,000 – 20,000) = 500,000 • Net Profit Ratio = [(40,000 / 500,000) × 100] • = 8% Viraj Chokshi Year 11 Ratios

  9. ROCE ratios (Return On Capital Employed) • The prime objective of making investments in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure of success of a business in realizing  this objective. • ROCE= (Net Profit/Capital employed)*100 Viraj Chokshi Year 11 Ratios

  10. Example • Net Profit=100000, Capital Employed=1000000 • ROCE= (Net Profit/Capital employed)*100 ROCE= (100000/1000000)*100 ROCE= 10% Viraj Chokshi Year 11 Ratios

  11. Current Ratio • This measures how easily a business can meet its immediate financial obligations. • It should be between 1.5 and 2. If its too low the business may have difficulty paying its debts. If it is too high then it suggests that money is being tied up unprofitably. • Current Ratio = Current Assets / Current Liabilities Viraj Chokshi Year 11 Ratios

  12. Example • Current assets are $1,200,000 and total current liabilities are $600,000. • Calculate current ratio. • Current Ratio = 1,200,000 / 600,000 = 2 Viraj Chokshi Year 11 Ratios

  13. Acid-Test Ratio • Stocks are very hard to turn it into cash. • If a high proportion of current assets is held in stocks, it may be difficult to liquidate these quickly. Taking stock away from current assets gives a better measure of liquidity. • It should be 1. • ATR= (Current Assets- Stocks)/Current Liabilities Viraj Chokshi Year 11 Ratios

  14. Example • Current Assets including stock= 100000, Stock= 60000, current liabilities=40000 • ATR= (Current Assets- Stocks)/Current Liabilities ATR= (100000-60000)/40000 ATR= 1 Viraj Chokshi Year 11 Ratios

  15. Overheads Ratio • Expense ratios indicate the relationship of various expenses to net sales. • Particular Expense = (Particular expense / Net sales) × 100 Viraj Chokshi Year 11 Ratios

  16. Example • Expenses=80000, Sales=100000 • Particular Expense = (Particular expense / Net sales) × 100 P.E.= (80000/100000)*100 =80% Viraj Chokshi Year 11 Ratios

  17. Gearing • Gearing shows how much of the capital employed is by loans. • Gearing=(Loan finance/Capital employed)*100 Viraj Chokshi Year 11 Ratios

  18. Example • Loan=100000, Capital employed= 200000 • Gearing=(Loan finance/Capital employed)*100 Gearing= (100000/200000)*100 Gearing=50% Viraj Chokshi Year 11 Ratios

  19. Mark-up • Mark-up also means Profit Margin. • Markup is the amount of profit added to the cost of sales. • Markup=(Gross Profit/Cost of goods sold)*100 • Gross Profit= Sales – Cost of goods sold • Cost of goods sold= (Opening Stock + Purchases) – Closing Stock Viraj Chokshi Year 11 Ratios

  20. Example • Sales=600000, Opening Stock= 100000, Purchases=50000, Closing Stock=50000 • Cost of goods sold= (Opening Stock + Purchases) – Closing Stock • COGS= (100000+50000)-50000= 100000 • Gross Profit= Sales – Cost of goods sold • G.P= 600000-100000=500000 • Markup=(Gross Profit/Cost of goods sold)*100 • M.U.= (500000/100000)*100= 500% mark-up. Viraj Chokshi Year 11 Ratios

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