BusinessStudiesOnline:Slide1

Analysing Business Performance

Analysing Business Performance
enders
Will want to make sure they are going to get their money back
enders
Will want to make sure they are going to get their money back
mployees
They will want to know their jobs are safe
mployees
They will want to know their jobs are safe
Oncetheaccountshavebeenproducedtheycan
beusedtoassesstheperformance
Ofcoursetheownerswillwanttoknowthis,butsowill:
overnment
They will want tax revenue and jobs to be created
overnment
They will want tax revenue and jobs to be created
uppliers
They will want to know if they can rely on more sales
uppliers
They will want to know if they can rely on more sales
BusinessStudiesOnline:Slide2
Using Ratios
Using Ratios
RatioAnalysis
ProfitabilityRatios LiquidityRatios
These consider how good the
profits of the business are.
There are 3 profitability ratios:
1) The Gross Profit Margin
2) The Net Profit Margin
3) Return on Capital Employed
(ROCE)
These consider how well the
working capital of the business
has been managed. There are 2
liquidity ratios:
1) The Current Ratio
2) The Acid Test Ratio
Inordertoanalyseaccountswemustuseratios
Therearetwotypesofratiosthatwemustuse:
BusinessStudiesOnline:Slide3
Profitability Ratios
Profitability Ratios


The Gross Profit Margin
The Gross Profit Margin
Calculatedusingthefollowingformula:
Thiscomparesgrossprofitwiththesalesmade
Thehigherthisfigureisthebetter
E.g.agrossprofitmarginof56%meansthatforevery
1ofsales,afirmmakes56pencegrossprofit
100 x
Revenue Sales
Profit Gross
Margin Profit Gross =
From
TPL
Account
From
TPL
Account
BusinessStudiesOnline:Slide4
Profitability Ratios
Profitability Ratios


The Net Profit Margin
The Net Profit Margin
Calculatedusingthefollowingformula:
Thiscomparesnetprofitwiththesalesmade
Thehigherthisfigureisthebetter
E.g.anetprofitmarginof32%meansthatforevery
1ofsales,afirmmakes32pencenetprofit
100 x
Revenue Sales
Profit Net
Margin Profit Net =
From
TPL
Account
From
TPL
Account
BusinessStudiesOnline:Slide5
Profitability Ratios
Profitability Ratios


The Return on Capital Employed
The Return on Capital Employed
Calculatedusingthefollowingformula:
Thiscomparesnetprofittotheamountof
moneyinthebusiness
Thehigherthisfigureisthebetter
E.g.aROCEof12%meansthatforevery1invested
inthebusiness,afirmmakes12pencenetprofit
Thiscanbeusedtocomparetheperformanceofthe
businesswiththeinterestfromabankaccount
100 x
Employed Capital
Tax Before Profit Net
(ROCE) Employed Capital on Return =
From
Balance
Sheet
From TPL
Account
BusinessStudiesOnline:Slide6
Liquidity Ratios
Liquidity Ratios


The Current Ratio
The Current Ratio
Calculatedusingthefollowingformula:
Theanswerisshownasaratio
E.g.acurrentratioof1.56wouldbeshownas:
1.56:1
Thismeansthatforevery1abusinessowesithas
1.56ofassetsthatcanbesoldtopayit
Theidealisbelievedtobebetween1.5and2
s Liabilitie Current
sets CurrentAs
Ratio Current =
From
Balance
Sheet
From
Balance
Sheet
BusinessStudiesOnline:Slide7
Liquidity Ratios
Liquidity Ratios


The Acid Test Ratio
The Acid Test Ratio
Calculatedusingthefollowingformula:
Theanswerisshownasaratio
E.g.anacidtestratioof1.24wouldbemeanthatfor
every1abusinessowesithas1.24ofassetsthat
canbesoldveryquicklytopayit.
Stockisnotincludedbecauseitmaynotbeafinished
goodreadyforsale
Theidealisbelievedtobe1
s Liabilitie Current
Stock sets CurrentAs
Ratio Test Acid =
Both From
Balance
Sheet
From Balance
Sheet