Financial ratios

• Tourism
• Foundation Degree

Ratio analysis and Financial Performance 

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 

A balance sheet contains......

1. Current assets
2. Non current assets
3. Current liabilities
4. Non current liabilities

Buildings and machinery would be....

1. Current asset
2. Non current asset
3. Current liability
4. Non current liability

Which are current assets?

1. Stock
2. Cash
3. Vehicles
4. Computers

Which are non current liabilities?

1. Mortgage
2. Overdraft
3. Bank loan (10 years)
4. Creditors

How do you feel about ratio analysis?

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Have you studied ratio analysis before?

Yes

No

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

What are ratios?

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

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 

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

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

www.macrotrends.net

Three types of ratio for you to learn 

Profitability 

Performance 

Liquidity 

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

Apply / Practice 

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

Apply / Practice 

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)

Apply / Practice 

Now how do you feel about ratio analysis?

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Plan for next week