17
Accounting
Ratio
Reference:
Chapter 1 and 11
（Book 2）
1
A
Profitability Ratios (盈利能力比率)
•Profitability refers to the ability to
make profit.
2
1
Mark-up (加成)
Mark-up ＝Gross profit ÷ Cost of sales X 100%
e.g.：Cost of sales ＝ $4
Gross profit ＝ $1
Ans.：Mark-up ＝ $1 ÷ $4 ＝ ¼
or 25%
Explanation： Every $4 cost has
$1 profit
3
2
Gross profit margin (毛利率)
Gross-profit margin＝Gross profit ÷ Sales X 100%
e.g.: Sales ＝ $5
Gross profit＝ $1
Ans.: Gross profit margin
＝ $1 ÷ $5 ＝ 1/5 or 20%
Explanation: Every $5 sales has $1 profit.
4
The relationship between mark-up and margin
Mark-up changes to gross profit margin
If mark-up is ¼
Denominator (分母)＋1
Gross profit margin is 1/5
Gross profit margin changes to mark-up
If gross profit margin is 1/3
Denominator (分母)－1
Mark-up is 1/2
5
3
Net profit margin (純利率)
Net profit margin ＝ Net profit ÷ Sales X 100%
e.g.：Sales ＝ $100
Net profit ＝ $40
Ans.：Net profit margin
＝ $40 ÷ $100 X 100%
＝ 40%
Explanation：Every $100 sales has
$40 net profit.
6
4
Expenses–sales ratios
• shows how much of expenses spends on
every $100 of sales
Expenses-sales ratios ＝（Operating expenses ÷Sales）× 100%
e.g.：Operating expenses ＝ $400
Sales ＝ $1000
Ans：Expenses–sales ratios
＝ （$400 ÷ $1000）× 100% ＝ 40%
Explanation：Every $100 Sales spends $40
expenses。
7
5
Rate of returns on capital employed
•Rate of returns on capital employed gives an
overall picture of the profitability of the company.
Rate of returns on capital employed
＝（Net profit ÷ Capital employed*）× 100%
*Capital employed: can be average capital
e.g.：Capital ＝ $1000
Net profit ＝ $200
Ans.：Rate of returns on capital employed
＝ （$200 ÷ $1000）× 100% ＝ 20%
Explanation：Every $100 capital earned $20
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net profit.
B Liquidity Ratios
•Liquidity ratios measure the ability
to meet the company’s debts.
9
1 Current ratio / Working capital ratio
• Current ratio measures current assets against
current liabilities.
Current ratio＝Current assets÷Current liabilities
Or
Current ratio＝Current assets ： Current liabilities
＝Z：1
10
e.g.：Current assets ＝ $200
Current liabilities ＝ $100
Ans.：Current ratio＝ $200 ： $100
＝2：1
Explanation：Current assets are double to
current liabilities.
• If the current ratio is too high (Normal level
is 2：1), the firm may have excessive
current assets。
• If the current ratio is too low, the firm may
have insufficient current assets to meet its
11
short-term liabilities.
2 Quick ratio / Acid test ratio
• Quick ratio is a stricter measure of liquidity .
• Current asset, can be converted into cash
quickly, compares with the current liabilities.
Current ＝（Current －Stock）÷ Current
ratio
assets
Liabilities
or
Current ＝（Current －Stock） ： Current
ratio
assets
Liabilities
＝Y：1
12
e.g.：Current assets ＝ $200
Current liabilities ＝ $100
Stock ＝ $50
Ans：Current ratio＝ $200 － $50 ： $100
＝ 1.5 ： 1
Explanation：The current assets excluding
stock is 1.5 times to the current liabilities.
• High quick ratio shows the ineffective use of
current assets of the the company.
• Quick ratio is less than 1：1 means there is
not enough current assets to pay current
liabilities.
13
C Efficiency Ratios
•Efficiency ratios check whether the
company utilises the assets
efficiently (manages efficiently).
14
1
Stock turnover rate
• Stock turnover rate measures the efficiency
of the stock management.
Stock turnover rate ＝
Cost of goods sold ÷ Average stock ＝ Y times
or
Stock turnover rate
＝（Average stock ÷ Cost of goods sold）× 365 days*
＝ Y days
Average stock ＝ （Opening stock＋Closing stock）÷ 2
*365 days or 56 weeks or 12 months
15
e.g.：Cost of goods sold＝ $100
Opening stock＝ $10
Closing stock ＝ $30
Ans.：Average stock ＝ （$10 ＋ $30）÷ 2
＝ $20
Stock turnover＝ $100 ÷ $20 ＝ 5 times
or Stock turnover＝（$20 ÷ $100）×365 days
＝ 73 days
Explanation：The higher the stock turnover, the
more profit we make.
• The lower the stock level , the higher the stock
turnover rate.
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2 Debtors collection period / Debtors days /
Credit period allowed to trade debtors
• Debtors collection period shows how long on
average our debtors pay us.
Debtors collection period
＝（Debtors ÷ Sales）× 365 days*
＝ Y days
*365 days or 56 weeks or 12 months
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e.g.：Debtors＝ $100
Sales＝ $1000
Ans.：Debtors collection period
＝（$100 ÷ $1000） × 365 days
＝ 36.5 days
Explanation：The debtors need 36.5
days to pay the debts.
The shorter the period, the better the
liquidity of the company.
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3 Creditors repayment period / Creditors days/
Credit period received from trade creditors
• Creditors repayment period shows how long we
pay our creditors.
Creditors repayment period
＝（Creditors ÷ Purchases）× 365 days *
＝ W days
*365 days or 56 weeks or 12 months
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e.g.：Creditors＝ $100
Purchases＝ $800
Ans.：Creditors repayment period
＝（$100 ÷ $800） × 365 days
＝ 45.6 days
Explanation：The company needs 45.6 days
to pay the debts.
• The longer to pay the debts, the company
losses the possible cash discounts.
• Too early payment affects the financial status
of the company.
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D Steps on ratios analysis
1. Explain the type of ratios it belongs to , e.g.
Profitability ratio.
2. Compare the changes of each ratio, i.e.
increase or decrease.
3. Explain the effect of the increase or decrease
of each ratio on different aspects, e.g.
profitability.
4. Check whether there is any effect on other
ratios.
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