Appendix 8
THE RATIOS AT A GLANCE
LIQUIDITY RATIOS

Current Ratio
Current Assets
Current Liabilities

Quick Ratio (Acid test)
Current Assets – Inventory
Current Liabilities - Bank Overdraft

Current Liquidity Ratio
(Current liabilities - bank overdraft) - liquid assets x 365
Cash flow from operations

Defensive Interval
Liquid assets x 365
Projected Expenditures
FINANCE / LEVERAGE RATIOS

Gearing ratio
Debt
Debt and Equity (Debt means long term and short term debt)

Debt to equity ratio
Total Debt
Shareholders’ Equity

Interest Cover
EBIT
(earnings before interest and taxes)
Interest paid

Fixed Charges Coverage Ratio
EBIT
(earnings before interest and taxes)
Annual Financial Fixed Charges (interest + lease payments)

Cash Coverage Ratio
EBIT + non cash expenses
Interest paid

Fixed Charges Coverage Ratio
EBIT + Lease Payment
Annual Financial Fixed Charges (interest + lease payments)

Capital Expenditure Ratio
Cash from Operation
Capital Expenditures

Effective Interest Rate
There are two methods of calculating the effective interest rate, these being:
(i) Calculating the total cost of debt (internal measure):
Interest Payments x 100%
Average total debt
(ii) Calculating interest rate on interest bearing debt:
Interest Payments
x 100%
Average interest bearing debt

Dividend Cover
Net Profit
Dividend
ACTIVITY RATIOS

Inventory Turnover
Cost of Goods Sold
Average Inventory (beginning year inventory + end of year inventory divided
by two)

Debt Collection Period / Debtor Days
Accounts Receivables x 365
Credits Sales
(Accounts receivable as at year end can be used or the average receivables)

Trade Payable Period
Trade Creditors x 365
Cost of Goods Sold

Average days to convert inventory to cash
Raw material turnover in days + Days to produce an item + Finished goods
inventory turnover in days + Days between dispatch and invoice preparation +
Debt collection period

Net Current Assets to Sales
(Debtors + Inventory - Creditors)
Sales

Tangible Fixed Assets to Sales
Net Book Value of Tangible Fixed Assets x %
Sales

Capital Expenditure versus Depreciation
Capital expenditure in year (gross)
Depreciation charge for year

x %
Fixed Asset Turnover
Sales
Average Fixed Assets

Capital Expenditure vs Depreciation
Capital expenditure in year (gross)
Depreciation charge for year

Average Age of Fixed Assets
Current Net Book Value
Original Cost
PROFITABILITY

Gross profit margin (%)
Gross profit
Sales

Mark Up %
Selling price - costs of goods sold
Cost of goods sold

Costs of Goods Sold %
Cost of goods sold
Sales

Net operating margin
Gross profit - operating expenses – administration expenses
Sales
Or
EBIT
Sales

Profit per employee
Net operating profit
Number of employees

Breakeven point
Fixed expenses
((Sales - Variable expenses)/Sales)

Margin of safety (%)
(Sales - Breakeven point)
Sales
SHAREHOLDER RETURN

Return on total assets - management perspective
EBIT
(earnings before interest & tax)
Average assets

Return on assets - shareholder perspective
NPAT
(net profit after tax)
Average assets

Return on net operating assets (RONOA
EBIT
Net operating assets (operating fixed assets + stock + debtors - creditors)

Earnings per share (EPS)
Net income after tax
Number of shares on issue
A variation of EPS is Cash EPS which is defined as
Cash flow (Net profit + Depreciation)
Number of shares on issue

Price Earnings Ratio
Market price per share
Earnings per share

Dividend yield
Dividends per share
Market price per share


Shareholders return
i.
Capital return
Current market share price - Cost of shares purchased
Cost of shares purchased
ii.
Dividend yield
Dividend per share
Current market share price
iii.
Total return
Capital return + Dividend yield
Net Asset Backing (NAB)
Net assets less intangibles
Number of shares on issue
This analysis can be further refined by comparing the market value of the
shares to their net asset backing :
Market value per share
Net asset backing

Return on equity (ROE)
Net profit after tax
Total equity

Cost of debt
Interest rate
(1 - tax rate)

Cost of equity
Re = Rf + βe (Rm - Rf)