Financial Ratios
First let’s put ratios into context as in isolation they can be meaningless. They need to be:
- consistently calculated and used
- compared over periods of time to understand trends
- benchmarked to similar companies
- compared to the industry as a whole (norms)
Here are the key ratios you may need to calculate on a regular basis to understand what is happening in your business:
Performance Ratios
(Profit and turnover)
Return on Capital Employed (ROCE)
Operating Profit x 100
Capital Employed
Profit Margin
Operating Profit x 100
Sales
Asset Turnover
Sales
Net assets
Gross Profit Margin
Gross Profit x 100
Sales
Stock Turnover
Cost of Sales (or Sales)
Stock
Debtor Days
Debtors x 365
Sales
Creditor Days
Trade creditors x 365
Purchases (cost of sales – wages)
Financial Status Ratios
(Borrowing and solvency)
Gearing
Borrowing x 100
Shareholders Funds
Interest cover
Operating profit
Loan Interest
Current Ratio
Current assets
Current liabilities
Acid Test
Current assets – stock
Current liabilities
Growth Ratios
(Sales and profit growth)
Sales Growth
Sales this year – Sales last year x 100
Sales last year
Profit Growth
Profit After Tax this year – PAT last year x 100
PAT last year
Employee Ratios
(Performance per employee)
Wages per employee i.e. total eages divided by no. of employees
Sales per employee i.e. total sales divided by no. of employees
Profit per employee i.e. Net profit divided by no. of employees
Net assets per employee i.e. net assets divided by no. of employees
Investment Ratios
(What’s in it for the owner or shareholder?)
Return on net assets
Profit x 100
Net assets
