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A2 Chapter 35 Analysis of published accountsSee case study page 505 Cola Giants
** NB See Chapter 30 for profitability & liquidity ratios **
Interpreting Company performance
Classification of accounting ratios
1. Profitability ratios:
Compare profits with sales revenue and capital employed.
• GPM (See Ch 30)
• NPM/OPM (See Ch 30)
• ROCE
2. Liquidity ratios:
Reflect how easily the firm can pay off its current liabilities.
• Current ratio (See Ch 30)
• Acid test ratio (See Ch 30)
3. Financial efficiency ratios:
Indicate how efficiently a business is using its resources and
collecting debts.
• Inventory turnover ratio
• (Other inventory ratios not examinable)
• Days' sales in receivables ratio
4. Shareholder ratios:
Assess the rate of return on shareholders' investments.
• Dividend yield ratio (& Dividend per share)
• Dividend cover ratio
• Price/earnings ratio (& earnings per share)
5. Gearing ratios:
Examine the extent to which operations are financed by longterm
loans. Thus these indicate the business's financial strategy.
• Gearing ratio (%)
• (Others not examinable)
, 1. Profitability ratios:
Compare profits with sales revenue and capital employed.
Reflect efficiency of management in terms of turning a profit from
sales and capital employed.
See Ch 30 for GPM & NPM/OPM. Activity 35.1 page 506
Return on capital employed (ROCE)
ROCE (%) = operating or net profit before tax x 100
capital employed
Capital employed = (noncurrent assets + current assets) current
liabilities OR
Capital employed = noncurrent liabilities + shareholders' equity
See example page 506
ROCE is often referred to as the primary efficiency ratio it
compares profit made with the money invested into the business.
This ratio is likely to compared with:
• Previous year's results.
• Other businesses in the same industry.
• Bank interest rates (could more have been made at less risk at
the bank?)
• Cost of borrowing if the funds were borrowed at a higher rate,
returns to shareholders would decrease.
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