Abbreviations
GPM
Gross profit margin
Calculate the total revenue when a company sells 5000 bags and one costs 20$.
Total revenue= 5000 x 20$ = 100 000$
What does a liquidity ratio measure?
The firm’s ability to convert it’s short-term assets to cash
What is the formula for the current ratio?
Current ratio=Current assets ÷ Current liabilities
TRUE OR FALSE: Share capital is an internal source of finance
True
COGS
Cost of goods sold
Calculate the debtor days if a company has average trade receivables of $5,000,000 and its annual sales are $30,000,000.
($5,000,000 ÷ $30,000,000) x 365 = 60.83
What is the purpose of a break-even analysis?
To determine the minimum output that must be exceeded for the business to profit
How are debtor days calculated?
Debtor days=(Debtors ÷ Total sales revenue) x 365
What is the formula for net cash flow?
Net cash flow = Cash inflows - Cash outflows
ROCE
Return on capital employed
The fixed costs of the company producing water bottles consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable costs associated with producing one water bottle is $2 per unit and the water bottle is sold at a premium price of $12. Calculate the break even point of Company's premium water bottle.
Break-even point= $100,000 / ($12 – $2) = 10,000
What are the possible drawbacks of a high gearing ratio?
It is harder to get loans from possible investors, if the firm has low profits then struggling to meet interest payments
How is the cost of goods sold (COGS) calculated?
COGS= opening stock + purchases - closing stock
TRUE OR FALSE: Internal stakeholders are parties within the business that are interested in the final accounts?
True
NPV
Net present value
Calculate the current ratio of the company:
Current assets = 17 + 22 + 24 = 63 million
Current liabilities = 15 + 15 = 34 million
Current ratio = 63 million ÷ 34 million = 1.85x
Name two strategies to improve the stock turnover ratio
Lower prices, increase promotion, stock only fast-selling items, use the just-in-time stock method, better sales forecasting
How is depreciation using the straight line method calculated?
Depreciation= (Purchase price - Residual value) ÷ estimated useful life
What is the normal Gearing Ratio (in%) for a healthy business?
25%-50%
ARR
Average rate of return
A company reported a net income number of roughly $48 billion for the year ending September 30, 2018 and it's revenue was $229 billion for the same period. Calculate the company's net profit margin.
Net Profit Margin= (Net income ÷ Revenue) × 100
NPM= ($48B ÷ $229B) x 100= 21%
Name two possible strategies to improve the return on capital employed ratio
Increase EBIT(earnings before interest and taxes), reduce long-term liabilities, reduce equity and retained profit
How is the average rate of return found?
ARR= (Total returns - Capital cost) ÷ years of use ÷ capital cost x 100
Define liquidity
It describes the degree to which an asset can be quickly realized, without losing the assets value