# Financial ratios

Ratio analysis and Financial Performance
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Slide 1: Slide
TourismFoundation Degree

This lesson contains 24 slides, with interactive quizzes, text slides and 1 video.

Lesson duration is: 180 min

## Items in this lesson

Ratio analysis and Financial Performance

#### Slide 1 -Slide

Lesson objectives

• Describe the purpose of financial ratios
• Describe how to calculate eight financial ratios
• Explain the financial position of easyJet
• Carry out eight calculations

First though.....recap on balance sheets

#### Slide 2 -Slide

A balance sheet contains......
A
Current assets
B
Non current assets
C
Current liabilities
D
Non current liabilities

#### Slide 3 -Quiz

Buildings and machinery would be....
A
Current asset
B
Non current asset
C
Current liability
D
Non current liability

#### Slide 4 -Quiz

Which are current assets?
A
Stock
B
Cash
C
Vehicles
D
Computers

#### Slide 5 -Quiz

Which are non current liabilities?
A
Mortgage
B
Overdraft
C
Bank loan (10 years)
D
Creditors

#### Slide 7 -Video

How do you feel about ratio analysis?
😒🙁😐🙂😃

#### Slide 8 -Poll

Have you studied ratio analysis before?
Yes
No

#### Slide 9 -Poll

Ratio analysis is used to interpret the financial information contained within the income statement and the Statement of Financial Position

#### Slide 10 -Slide

What are ratios?
Ratios are figures which express the key relationships in a set of accounts by comparing one figure with another.

#### Slide 11 -Slide

Ratio analysis is used to:
- Assess the organisation's financial performance

- Evaluate the financial stability of the organisation

- Predict the future performance and stability of the organisation

#### Slide 12 -Slide

What benefits would comparing ratios over two years give the company?

#### Slide 13 -Open question

What external factors impact on a business but are not identified through ratio analysis?

#### Slide 14 -Mind map

Three types of ratio for you to learn

Profitability
Performance
Liquidity

#### Slide 16 -Slide

Profitability - These ratios reveal a company’s ability to generate profits.
Ratio                                                                     Method of calculation
Gross Profit Margin (%)                                Gross profit x 100 / sales

Net profit Margin (%)                                     Net profit x 100 / sales

Return of Capital Employed (%)               Net profit x 100 / capital                                                                                      employed

#### Slide 17 -Slide

Apply / Practice

#### Slide 18 -Slide

Liquidity - These ratios assess a company’s ability to meet its short-term debts.
Ratio                                                          Method of calculation
Current ratio                     Current assets : current liabilities
Optimum value - 1:8

Acid test                             Current assets – closing stock : current liabilities
Optimum value - 0:8

#### Slide 19 -Slide

Apply / Practice

#### Slide 20 -Slide

Performance - These ratios assess how efficiently a company utilises its assets
Ratio                                                                     Method of calculation
Stock turnover                                                 Average stock/Cost of sales x 365
(days)

Debtor collection period                            Debtors x 365 / sales
(days) ideal (30 days)

Creditors payment period                           Creditors x 365 / cost of sales
(days) (40-50 days)

#### Slide 21 -Slide

Apply / Practice

#### Slide 22 -Slide

Now how do you feel about ratio analysis?
😒🙁😐🙂😃

#### Slide 23 -Poll

Plan for next week