Ratios from the Statement of Financial Position

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1 For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends in the process of doing business. When you compare profit to sales volume, you can determine whether you're making enough of a profit. Return On Sales (%) = (Net Profit Sales) % Return on Equity Ratio It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its shareholders. Return on Equity = Net Profit Net Assets Times Return on Assets Ratio This number tells you how effective your business has been at putting its money to work. The ROA is a test of capital utilisation -- how much profit a business earned on the total capital used to make that profit. This ratio is most useful when compared with the interest rate paid on the company's debt. For example, if the ROA is.15 (15%) and the interest rate paid on its debt was 10%, the business's profit is 5 percentage points more than it paid in interest. Return On Assets = Net Profit Total Assets 0.43 Times Business Page 5

2 For The Year Ended 31 March 2007 Liquidity Ratios Analysing Liquidity Ratios The issue of liquidity, as you might expect, concerns creditors. Liquidity is a company s ability to meet its debts as they come due. A company may have considerable total assets, but if those assets are difficult to convert to cash it is possible that the company might be unable to pay its creditors in a timely fashion. Creditors want their loans to be paid in the medium of cash, not in a medium such as inventory or factory equipment. Cash Ratio This measures the percentage of all assets that exist as cash. Cash Ratio = Total Cash Current Liabilities 1.49 Times Current Ratio This is the standard measure of any business's financial health. You derive this ratio from the figures on your balance sheet. It tells whether a company has enough assets to cover its liabilities. The standard current ratio is 2:1. Current Ratio = Current Assets Current Liabilities 3.98 Times Quick Ratio, or Acid Test This is a tougher measure of liquidity than the current ratio because it excludes inventories when counting assets. It calculates the company's liquid assets in relation to its liabilities. The higher the ratio, the higher the business' level of liquidity, which usually corresponds to its financial health. The quick ratio also indicates whether a business could pay off its debts quickly, if that becomes necessary. The desired quick ratio is 1:1. Quick Ratio = (Current Assets - Inventories) Current Liabilities 3.51 Times Business Page 6

3 For The Year Ended 31 March 2007 Working Capital to Sales % Working capital measures how much in liquid assets a company has available to build its business and this ratio shows the proportion this is to total sales. A business that sells a lot of low-cost items, and cycles through its inventory rapidly (a grocery store) may only need 10-15% of working capital per dollar of sales. A manufacturer of heavy machinery and high-priced items with a slower inventory turn may require 20-25% working capital per dollar of sales. Working Capital to Sales % = ((Current Assets Current Liabilities) Total Revenue) % Management Efficiency Ratios Days In Account Receivable Ratio This number indicates how quickly your customers are paying you. The greater the number of times your receivables turn over during the year, the shorter the time between sales and cash collection. If this number is low compared to your industry average, it may mean your payment terms are too lenient or that you aren't doing a good enough job on collections. Days in Accounts Receivable = (Accounts Receivable Credit Sales) Days Days in Accounts Payable Ratio This number tells how quickly you are paying your bills. The payables turnover ratio reveals how often your payables turn over during the year. A high ratio means a relatively short time between purchase of goods and services and payment for them. A low ratio may be a sign that the company has chronic cash shortages. Days in Accounts Payable = (Accounts Payable Purchases 3 ) Days Business Page 7

4 For The Year Ended 31 March 2007 Annual Inventory Turnover Ratio This ratio tells how often your business' inventory turns over during the course of the year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for the industry could mean you are losing sales because of inadequate stock on hand. Inventory Turnover = Cost of Goods Sold the Value of Inventory Times P.A Days In Inventory This ratio gives the number of days equivalent to the inventory turnover. Days in Inventory = 365 Annual Inventory Turnover Days Operating Ratios Asset Turnover This is a measure of how well assets are being used to produce revenue. Also called total asset turnover. Asset Turnover = Net assets Total assets 1.99 Times P.A Business Page 8

5 For The Year Ended 31 March 2007 Sales to Fixed Assets This is a measure of a company's profitability, it measures how much a company earns on each dollar sunk into assets. The number tells you how productively a business is using the physical resources that the company owns -- the higher the number the better. Return on Assets = Total Revenue Total Assets 4.86 Times P.A Sales to Working Capital A measure of how effectively a company uses the money (borrowed or owned) invested in its operations. Sales to Working Capital = Total Revenue (Current Assets Current Liabilities) 4.63 Times P.A Financing Ratios Debt to Equity Ratio This ratio indicates how much the company is leveraged (in debt). A high debt to equity ratio could indicate that the company may be over-leveraged, and should look for ways to reduce its debt. Debt To Equity = Total Liabilities Net Assets Times Business Page 9

6 For The Year Ended 31 March 2007 Times Interest Earned A measurement of a business's ability to pay its debts; a multiple by which recurring income provides for payment of interest income. If a business can keep current on its interest payments, the business can usually refinance principal and maintain the confidence of creditors. Formula: Times Interest Earned = (Operating Profit 5 + Interest) Interest Days Financial Results Net Profit This shows the amount of your sales dollar that remains for profit after all expenses. Net Profit = Operating Profit + Non Operating Revenue $38,175 $19,458 $49,791 $81,665 $168,952 $67,638 Business Page 10