Operating Ratios

Ratio Method of Calculation Significance

Sales Return Sales Returns x 100 Measures the saleability of stock
Sales
Sales Discounts Sales Discounts x 100 Measures the extent to which the terms
Sales of sale affect turnover
Gross Margin Cost of Goods Sold x 100 Shows the relationship between costs and
Sales sales value of items sold
Cost of Goods Sold Cost of Goods Sold - Sales x 100 Shows the margin between sales and costs
Sales
Net Profit Margin Trading Profit Before Interest & Tax x 100 Measures the efficiency of the
Sales organisation to generate profits from
sales
Productivity Value Added x 100 Measures the additional wealth created
Sales by the organisation
Tax Ratio Tax Charge x 100 Measures the proportion of tax charged
Profit Before Tax
Expense Items Expense x 100 Relates individual expenses, eg research
Sales and development, to sales
Return on Capital Employed Trading Profit x 100 Measures the efficiency of the
Tangible Net Assets organisation
Return on Total Assets Trading plus Other Income x 100 Measures the efficiency in utilizing
Total Assets available assets
Revenue and Expense Item Depreciation Charge x 100 Identifies depreciable assets and the
Gross Depreciable Assets extent of the depreciation provision
Total Assets Turnover Total Assets Measures the utilization of assets in
Sales generating sales
Debtors' Turnover Sales Measures the control of credit
Average Debtors
Stock Turnover Sales Measures the control of stocks in relation
Average Stocks to sales
Creditors' Turnover Sales Measures the speed of payment by creditors
Trade Creditors
Efficiency Ratios
Ratio Method of Calculation Significance
Operating Leverage Percentage change in Measures the extent to which fixed costs
Earnings Before Interest and Taxation (EBIT) are used in the organization's operations
Percentage change in Output
Financial Leverage EBIT Measures the debt utilization in
EBIT - Interest Expense financing assets
Debt Ratio Total Liabilities Measures the proportion of assets
Total Assets financed through borrowings and the
extent of trading on equity
Equity Ratio Shareholder's Funds Shows the protection to creditors and
Total Assets the extent of trading on equity
Debt to Equity Ratio Total Debt Shows the relationship between borrowed
Shareholder's Funds capital and capital invested by
shareholders
Total Debt to Total Assets Debt + Current Liabilities x 100 Measures the percentage total funds
Total Assets provided by creditors
Interest Cover Profit Before Interest Measures the extent to which interest
Interest charges are covered by profits
Liquidity Ratios
Ratios Method of Calculation Significance
Current Ratio Current Assets Measures the organization's liquidity
Current Liabilities position
Liquid Ratio Current Assets - Stocks Measures the ability to meet short term
Current Liabilities liabilities
Cash days to Sales Short Term Investments plus Cash x 100 Indicates the reasonableness of liquid
Sales assets in relation to sales
Gross Funds to Debt Gross Funds from Operations x 100 Measures the extent to which short term
Current Liabilities and Loans obligations are covered by gross funds
No Credit Interval Debtors plus Short Term Measures the number of days the most
Investments plus cash x 365 liquid assets could support operating
Operating expenses expenditures
- Depreciation
Investment Ratios
Ratios Method of Calculation Significance
Earnings Per Share (EPS) Earnings before Extraordinary items Shows the amount of earnings attributable
but after deducting tax, minority to each ordinary share
interest and preference dividends
Number of Ordinary Shares
Earnings Yield Earnings per Share (EPS) x 100 Shows the earnings return per share based
Price per Share on the current share price
Price Earnings Ratio Market Price per Share Measures whether the price of an ordinary
Earnings per Share share is in line with the organizations'
earnings
Dividend Yield Dividend per Share Measures the return to ordinary
Market Price per Share shareholders on the current market price
of the share
Dividend Cover Earnings per Share Measures the extent to which dividends
Net Dividend per Share are protected by earnings
Return on Equity Profit after tax but before extraordinary items Measures the efficiency in earning a
and after deducting minority interest satisfactory return on equity
and preference dividends shareholders investment
Equity Shareholders' Investment
Payout Ratio Ordinary and Shows the relationship between dividends
Preference Dividends x 100 and retained profits
Retained Earnings or Profit