(182)-SHAREHOLDERS INVESTMENT RATIOS

Shareholders Investment Ratios These are the ratios which help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of the company. They are: Earnings per share Dividend per share Dividend cover Price earning ratio (P/E ratio) Dividend yield Earnings yield The value of an investment in ordinary share in a listed company is its market value,...

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(181)-CREDITORS TURNOVER RATIO

Creditors Turnover Ratio Creditor’s turnover ratio is ideally calculated by the formula: Creditors turnover = (Trade creditors / Purchases) X 365 However, it is rate to find purchases disclosed in published accounts and so cost of sales serves as an approximation. The creditors’ turnover ratio often helps to assess a company’s liquidity; an increase in creditor’s days is often a sign of lack of long-term...

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(180)-EFFICIENCY RATIOS - STOCK TURNOVER PERIOD

Efficiency Ratios - Stock Turnover Period Another ratio worth to calculating is the stock turnover period, or stock days. This is another estimated figure, obtainable from publish accounts, which indicates the average number of days that items of stock are held for. As with the average debt collection period, however, it is only an approximate estimated figure, but one which should be reliable enough...

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(179)-EFFICIENCY RATIOS - DEBTORS PAYMENT PERIOD

Efficiency Ratios – Debtors Payment Period A rough measure of the average length of time it takes for a company’s debtors to pay what they owe is the “debtors’ days” ratio, or average debtors’ payment period. Debtors payment period = (Trade debtors / Sales) X 100 The estimated average debtors’ payment period is calculated as follows. The figure for sales should be taken as the turnover figure in the...

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(178)-LIQUIDITY RATIOS - QUICK RATIO

Liquidity Ratios – Quick Ratio Companies are not able to convert their entire current asset into cash very quickly. In particular, some manufacturing companies might hold large quantities of few material stocks, which must be used in production to create finished goods stocks. Finished goods stocks might be warehoused for a long time, or sold on lengthy credit. In such businesses, where stock turnover...

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(177)-LIQUIDITY RATIOS - CURRENT RATIO

Liquidity Ratios – Current Ratio The standard test of liquidity is the current ration. It can be obtained from the balance sheet, and is calculated as follows. Current ratio = Current assets / Current liabilities The idea behind that is a company should have enough current assets that give a promise of “cash to come” to meet its future commitments to pay off its current liabilities. Obviously, a ratio...

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(176)-THE CASH CYCLE

The Cash CycleTo help you to understand liquidity ratios, it is useful to obtain with a brief explanation of the cash cycle. The cash cycle describes the flow of cash out of a business and back into it again as a result of normal trading operations. Cash goes out to pay for supplies, wages and salaries and other expenses, although payments can be delayed by taking some credit. A business might hold...

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(175)-SHORT-TERM SOLVENCY AND LIQUIDITY

Short-term Solvency and Liquidity Profitability is the amount of course an important aspect of a company’s performance and debt or gearing is another. Neither, however, addresses directly the key issue of liquidity. Liquidity is the amount of cash a company can put its hands on quickly to settle its debts (and possibly to meet other unforeseen demands for cash payments too). Liquid funds consist of:...

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(174)-CASH FLOW RATIO

Cash Flow Ratio The cash flow ratio is the ratio of a company’s net cash inflow to its total debts. Net cash in flow is the amount of cash which the company has coming into the business from its operations. A suitable figure for net cash inflow can be obtained from the cash flow statement. Total debts are short-term and long-term creditors, together with provisions for liabilities and charges. A distinction...

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(173)-ACCOUNTING RATIO ANALYSIS - INTEREST COVER RATIO

Accounting Ratio Analysis – Interest Cover The interest cover ratio shows whether a company is earning enough profits before interest and tax to pay its interest costs comfortably, or whether its interest costs are high in relation to size of its profits, so that fall in Profit Before Interest and Tax (PBIT) would when have a significant effect on profits available for ordinary shareholders. Interest...

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(172)-THE IMPLICATIONS OF HIGH OR LOW GEARING

The Implications of High or Low Gearing We mentioned in earlier posts that gearing is, amongst other things, an attempt to quantify the degree of risk involved in holding equity shares in a company, risk both in terms of the company’s ability to remain in business and in terms of expected ordinary dividends from the company. The problem with a high geared company is that by definition there is a lot...

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(171)-CAPITAL GEARING RATIO

Capital Gearing Ratio The capital gearing ratio is a measure of the proportion of a company’s capital that is prior charge capital. It is measured as follows: Capital gearing ratio = Prior charge capital / Total capital Prior charge capital is capital carrying a right to fixed return. It will include preference shares and debentures. Total capital is ordinary share capital and reserves plus prior...

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(170)-GEARING RATIO

Gearing Ratio Capital gearing is concerned with a company’s long-term capital structure. We can think of a company as consisting of fixed assets and current assets (working capital, which is current assets minus current liabilities). These assets must be financed by long-term capital of the company, which is either: Share capital and reserves (shareholders’ funds) which can be divided into: Ordinary...

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(169)-DEBT RATIO

Debt Ratio The debt ration is the ratio of a company’s total debts to its total assets. Debt ratio = Total debts / Total assets Assets consist of fixed assets at their balance sheet value, plus current assets. Debt consists of all creditors, whether amounts falling due within one year or after more than one year. You can ignore long-term provisions and liabilities, such as deferred taxation....

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(168)-LONG TERM SOLVENCY: DEBT AND GEARING RATIOS

Long Term Solvency: Debt and Gearing Ratios Debt ratios are concerned with how much the company owes in relation to its size, whether it is getting into heavier debt or improving its situation, and whether its debt burden seems heavy or light. When a company is heavily in debt banks and other potential lenders may be unwilling to advance further funds. When a company is earning only a modest profit...

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(167)-ACCOUNTING RATION ANALYSIS

Return on Shareholders’ Capital (ROSC) Another measure of profitability and return is the return on shareholders’ capital (ROSC) ROSC = Profit on ordinary activities before tax / Share capital and reserves It is intended to focus on the return being made by the company for the benefit of its shareholders. Return on shareholders capital (ROSC) is not a widely-used ratio, however, because there are...

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