Ratio analysisLO: To know what ratio analysis

is and the different methods that can be used

What do you check for when buying new car?

You should check it’s performance

Miles per gallon

CO2 emissions

PERFORMANCE!

RATIOS HELP US CHECK BUSINESSES PERFORMANCE…

What is ratio analysis?Helps to draw conclusions about how well the

business is doingGives a more precise picture

2 MAIN PERFORMANCE INDICATORS

PROFITABILITY – Comparing revenue to costs

LIQUIDITY (cash) Comparing assets to liabilities

A.k.a – Working Capital

Profitability ratiosMeasure the performance of the business and focus on

profit, turnover and investmentGross profit marginGross profit x100 Sales Revenue

Net profit marginNet profit x100 Sales Revenue

Return on capital employedNet profit x100Capital employed

Liquidity ratiosMeasure how easily the business can pay its

debts and so how quickly things can be turned into cash

Current ratioCurrent assetsCurrent liabilitiesAcid test ratioCurrent assets - stockCurrent liabilities

Other ratiosGearing ratios – Compare the amount of

share capital to the amount of loan capitalShareholders’ ratios – Measure the return to

shareholders on their investment

https://www.youtube.com/watch?v=TZZFBkbC2lA

Questions Why would investors perform ratio analysis

What do liquidity ratios show

What are the different types of ratio analysis

What’s difference between net profit margin and ROCE?

Explain another ratio that could be used?