Equity Employed (at start) to measure the percentage return on the equity invested in the Purpose business Managers how useful is the equity employed in generating profits? – Current investors what rate of return is being given on equity – invested? Used by Potential investors is the return from this company better/worse than – from other companies? (Comparisons year on year and with other similar companies.) Comparison with current interest rates on Savings Accounts far safer investment – this ratio uses costs of the business’s assets. If asset values are historic Limitations inaccurate then the equity employed figure will also be inaccurate Improvements Improve Net Profit (reduce cost of expenses) Profit Mark-Up Gross Profit x 100 Formula Cost of Goods Sold to measure the percentage added to the cost of goods sold to calculate Purpose their selling price managers/directors, comparing year on year and other similar Used by companies no comment can be made unless trends over different time periods, or Limitations comparisons with other similar organisations are made cut the costs of production/manufacture purchasing cheaper goods Improvements increase the selling price to the consumer Liquidity Ratios Current Ratio (also called the Working Capital (equity) Ratio) Current Assets Formula Current Liabilities shown as something : 1 eg. 2.1 : 1 to measure whether the business has sufficient current assets to payment in full of current liabilities. Has the firm enough equity to meet all short-term debts? ‘working Purpose Compares assets that will become liquid in less than twelve months with liabilities that fall due in the same time period and other lenders, comparisons year Used by on year and between companies
Equity Employed (at start) Purpose to measure the percentage return on the equity invested in the business Used by Managers – how useful is the equity employed in generating profits? Current investors – what rate of return is being given on equity invested? Potential investors – is the return from this company better/worse than from other companies? (Comparisons year on year and with other similar companies.) Comparison with current interest rates on Savings Accounts – far safer investment Limitations this ratio uses historic costs of the business’s assets. If asset values are inaccurate then the equity employed figure will also be inaccurate Improvements Improve Net Profit (reduce cost of expenses) Profit Mark-Up Formula Gross Profit x 100 Cost of Goods Sold Purpose to measure the percentage added to the cost of goods sold to calculate their selling price Used by managers/directors, comparing year on year and other similar companies Limitations no comment can be made unless trends over different time periods, or comparisons with other similar organisations are made Improvements cut the costs of production/manufacture purchasing cheaper goods increase the selling price to the consumer Liquidity Ratios Current Ratio (also called the Working Capital (equity) Ratio) Formula Current Assets Current Liabilities shown as something : 1 eg. 2.1 : 1 Purpose to measure whether the business has sufficient current assets to payment in full of current liabilities. Has the firm enough ‘working equity to meet all short-term debts? Compares assets that will become liquid in less than twelve months with liabilities that fall due in the same time period Used by and other lenders, comparisons year on year and between companies