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Financial Ratios & Analysis

Financial Ratios are best explained using an example. Below are sample financial statements of a business achieving it's target ratios.

 

 Profit & Loss - Sample Client     Ratios
     
 Sales1 2,400,000      Double Breakeven
 Less COGS2  1,440,000       
 Gross Profit3  960,000      40%
 Overheads4  120,000      50% of Employment Costs
 Marketing5  120,000      5% of Sales 
 Employment Costs 6    240,000      25% of Gross Profit 
 Total Overheads7 480,000   
 Net Profit8  480,000      20% of Sales 
     

 Balance Sheet - Sample Client  
     
 Inventory9  250,000   
 Trade Debtors10  300,000   
 Trade Creditors11  (150,000)  
 Working Capital12  400,000      
 Fixed Assets13  350,000   
 Total Capital14  750,000   
     
 Total Debt15  300,000       40% Debt to Capital
 Total Equity16  450,000       67% Debt to Equity
 Total Funding17 750,000   

 

Below is a list of the common Key Performance Indicators we use to assist our clients:

 

Gross Profit Margin  A measure of the proportion of revenue that is left after deducting all costs directly related to the sales.  
 Gross Profit3 / Revenue1   [$960,000 / $2,400,000 = 40%]
   
Net Profit Margin A measure of the proportion of revenue that is left after deducting all operating expenses.
 Operating Profit8 / Revenue1
   
Return on Capital Employed                     A measure of the efficiency and profitability of capital investment (ie. funds provided by shareholders & lenders).
ROCE monitors the relationship between the capital ('inputs') used by the business and the earnings ('outputs') generated by the business.
 Annualised EBIT8 / Total Invested Capital14
   
Debt to Capital The debt-to-capital ratio is calculated by taking the company's debt, including both short- and long-term liabilities and dividing it by the total capital.
Total capital is all debt plus shareholders' equity, which may include items such as common stock, preferred stock and minority interest.
Total Debt15 / (Total Debt15 + Total Equity16)
   
Working Capital Absorption A measure of the adequacy of working capital to support sales activity. This measure indicates the investment made in working capital for each unit of revenue.
 (Trade Debtors10 + Inventory9 + WIP - Trade Creditors11) / Annualised Revenue1
   
Return on Equity A measure of how effectviely the business has used resources provided by its owners to generate profits.
  (Annualised Net Income8 / Opening Total Equity16)
   
Current Ratio A measure of liquidity. This compares total currents assets against total current liabilities.
   (Total Current Assets9+10 / Total Current Liabilities11)
   
Quick Ratio Measures the availability of assets which can quickly be converted into cash to cover current liabilities.
   (Cash Equivalents + Trade Debtors10)/Total Current Liabilities11)
   
Activity Ratio A measure of the efficiency in which the business manages its resources or assets.
 Annualised Revenue1 / Total Invested Capital14
   
Accounts Payable Days A measure of how long it takes for the business to pay it's creditors.
 Trade Creditors11 x Period Length / Total Costs of Sales2
   
Accounts Receivable Days A measure of how long it takes for the business to collect the amounts due from customers.
 Trade Debtors10 x Period Length / Revenue1
   
Inventory Days A measure of how efficiently the business converts inventory into sales.
 Inventory9 x Period Length / Total Cost of Sales2
   
Cash Conversion Cycle A measure of the length of time between purchase of raw materials and the collection of accounts from customers.
  (Inventory Days + AR Days + WIP Days - AP Days)
   
Debt to Equity A measure of the proportion of funds that have either been invested by the owners (equity) or borrowed (debt) and used by the business to finance its assets. 
 Total Debt15 / Total Equity16
   
Labour Productivity A measure of staff performance & efficiency against business output. 
 Gross Profit3 / Employment Costs (Wages + Super + Payroll Tax + Workcover)6
   
Economic Profit A measure of profit against cost of capital; where a positive economic profit represents the creation of value for shareholders.
Net Operating Profit After Tax - (Weighted Average Cost of Capital x Total Invested Capital14)
   
Break Even Point A measure to determine the amount of revenue or units that must be sold to cover fixed and variable costs associated with making those sales.
In Units   : Fixed Costs / Contribution Margin per Unit 
In Dollars: Sales Price per Unit x Break Even Point in Units
   

 

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