A tool used by individuals to conduct a quantitative analysis of information in a company’s financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company.
(Source: Investopedia)

• It simplifies financial statements
• It helps in comparing companies of different size with each other
• It helps in trend analysis which involves comparing a single company over a period
• It highlights important information in a simple to use form quickly. A user can judge a company by just looking at a few numbers instead of reading the whole financial statements

• One ratio result is not very helpful. Comparisons need to be made.
• May be difficult to compare firms in different industries.
• Trend analysis need to take into account changing circumstances over time which could have affected the ratio results.
• Ratios are only concerned with accounting items to which a numerical value can be given. There are qualitative factors to consider.

• Liquidity Ratios
• Profitability Ratios
• Efficiency / Activity Ratios
• Gearing / Solvency Ratios
• Investors/ Shareholders Ratios

RATIO
Current Ratio
CALCULATION
Current Assets / Curent
Liabilities expressed as
Current Assets : Current
Liabilities
Eg. 2:1
Quick / Acid Test
Ratio
(Current Assets – Stock) /
Current Liabilities expressed as Current
Assets - Stock : Current
Liabilities
Eg. 2:1
MEANING
This shows the ability of the firm to pay short term obligations as they fall due.
USE
Shareholders or investors in the firm can use this ratio to determine that if all creditors were to request their funds, would the firm be able to pay its debts and not suffer because of working capital problems.
The ideal ratio is 2:1.
This ratio is similar to the current ratio however, stock is excluded, as it is not as liquid as other current assets. It only becomes liquid when it is sold and this takes time.
This measures the real short term liquidity of the firm since stock is excluded.
There is an optimum ratio of
1:1 that firms try to keep however, a ratio of 0.55 to 1 and over is acceptable.

RATIO CALCULATION
Gross Profit Margin (Gross Profit / Sales
Revenue) x 100 expressed as a %
Net Profit Margin
Return on Capital
Employed (ROCE)
(Net Profit / Sales
Revenue) x 100 expressed as a %
(Net Profit / Capital
Employed) x 100 expressed as a %.
Capital Employed = Fixed
Assets + (Current Assets –
Current Liabilities)
MEANING
Shows the % of profit that is left after subtracting COGS from Sales. This is the amount available to pay expenses.
Reflects the performance os a business as it indicates how expenses are controlled.
Measures the extent to which capital is used to make a profit
USE
Indicates how effectively management uses labour and supplies. Shows how much is left to spend on other operations eg R &
D
To get a good sense of the non-direct costs such as administration and marketing. Assists in controlling them.
Used to determine the feasibility of the current investment in the firm.

RATIO
Stock Turnover
Ratio
CALCULATION
Cost of Sales /
Average Stock where Average
Stock = (Opening
Stock + Closing
Stock) / 2
Debtor Days Ratio (Debtors / Credit
Sales) x 365
Creditor Days Ratio (Creditors / Credit
Purchases) x 365
MEANING
Shows the number of times stock is ordered or replenished by the business for the year
Shows the average length of time it takes for the firm to collect its debts
Shows average length of time to pay short term debts
USE
Can assist the firm in determining how best to hold stock.
Can also indicate sales trends for planning purposes.
Normally combined with the creditor days ratio to indicate the cash flow situations.
Normally combined with the debtor days ratio to indicate the cash flow situations.

RATIO
Gearing / Leverage
Ratio
CALCULATION
(Long Term Debt /
Capital Employed) x
100 expressed as a
%
MEANING
Measures the degree to which capital of the business is financed by long term loans
USE
Shows the risk of investing in this type of business. If a business is highly geared, there is a lot of risk involved.
This should never be above 50%.

RATIO
Earnings Per Share
(EPS)
Dividend Yield
CALCULATION
(Net Profit-
Preference Share
Dividends) / No. of
Ordinary Shares
Latest Annual
Dividend Payment
Per Share/Current
Market Value Per
Share
MEANING
Indicates how much ordinary shares have contributed to making a profit
Shows dividends per share as a percentage of market price
USE
Can be used by investors to calculate return on investment.
Indicates returns earned on shares.

• Once you have calculated your ratios, do not restate the figures seen if doing an evaluation but instead look at the differences.
• Once a comparison is made, make inferences about the reason why the ratios are as they are.
• Ensure that you remember basic financial statements
• These are NOT ALL ratios, they are only the ones on the syllabus. A ratio is any form of comparison between figures and therefore you can be asked to calculate anything. Eg Wages to Sales Ratio.