Ratio Revision

This presentation will help me for revision of different ratios.

1Viraj ChokshiYear 11 Ratios

What I will cover:

Different types of ratios & their Formulas.

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What does the Syllabus want us to know?

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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

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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]

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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%

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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

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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%

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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

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Example

• Net Profit=100000, Capital Employed=1000000

• ROCE= (Net Profit/Capital employed)*100ROCE= (100000/1000000)*100ROCE= 10%

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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

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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

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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

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Example

• Current Assets including stock= 100000, Stock= 60000, current liabilities=40000

• ATR= (Current Assets- Stocks)/Current Liabilities

ATR= (100000-60000)/40000ATR= 1

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Overheads Ratio

• Expense ratios indicate the relationship of various expenses to net sales.

• Particular Expense = (Particular expense / Net sales) × 100

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Example

• Expenses=80000, Sales=100000

• Particular Expense = (Particular expense / Net sales) × 100

P.E.= (80000/100000)*100=80%

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Gearing

• Gearing shows how much of the capital employed is by loans.

• Gearing=(Loan finance/Capital employed)*100

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Example

• Loan=100000, Capital employed= 200000

• Gearing=(Loan finance/Capital employed)*100

Gearing= (100000/200000)*100Gearing=50%

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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

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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.

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