FDg– Managing Finance

Lesson Aims
• To learn the common accounting ratios
• To understand what they mean / how
they can be improved
• To analyse accounts by means of the
ratios
 Users of Accounts – people who
read / interpret financial statements

• Owners / Investors
• Lenders / Creditors / Suppliers
• Employees
• Tax Authorities
• Customers
 Use of Ratios / Percentages
• Makes it possible to compare one
business with another – even if they are
of different size
• Makes it possible to compare the
progress / decline of a business over
time by identifying trends
Analysis of Accounts will focus on

• Profitability
• Liquidity – ability to pay debts
• Financial Strength e.g. extent to which
business relies on borrowing
Apply accounting ratios to
Task 1 dodge packaging
Part A dax Ltd
Profitability Percentages
 Return on Capital Employed
Net Profit
x 100 = return on capital employed
Shareholders
Funds

25000 x 100 = 21.1%

118300
 Gross Profit Margin
Gross Profit
x 100 = gross profit margin
Sales

55000 x 100 = 31.4%

175000
 Net Profit Margin
Net Profit
x 100 = net profit margin
Sales

25000 x 100 = 14.3%

175000
Gearing – compares borrowed
money with owner’s capital

Borrowings x 100 = gearing

Capital

29200 x 100 = 24.7%

118300
• High Gearing = a large amount of
borrowing in relation to investment
• Low Gearing = a small amount of
borrowing in relation to investment
 Interest Cover
No figures given for dax but assume
interest for year was £4000

Net Profit before interest and tax

= interest cover
Interest payable

29000 = 7.3 times interest covered by profit

4000
Liquidity Ratios / Periods

Liquidity measures the business’

ability to meet its debts /
obligations as they become due.
Current Ratio / Working Capital Ratio
current assets
= current ratio
current liabilities

62500 = 2.58 : 1
24200
Liquidity Ratio/Quick Ratio/Acid Test
current assets minus stock
= liquidity ratio
current liabilities

17500 = 0.72 : 1
24200
 Stock Turnover Period
Average Stock
x 365 = stock turnover period
Cost of Sales

45000 x 365 = 137 days

120000 = how long stock is held
 Debtor Collection Period
Average Debtors
x 365 = debtor collection period
Credit Sales

17500 x 365 = 37 days

175000 = average period to collect trade debtors
 Creditor Payment Period
Average Creditors
x 365 = creditor payment period
Credit Purchases

15000 x 365 = 46 days taken to pay creditors

120000
 Operating Cycle
Period of time from paying for supplies to
getting paid for sales

Stock Turnover Period 137 Days

Add +
Debtor Collection 37 Days
Minus -
Creditor Payment 46 Days
= Operating Cycle = 128 Days