Summary of key accounting ratios

Profitability
Return on equity (%)

Profit after tax

Shareholders equity

Return on capital
employed (%)

Profit from operations (PBIT)

Capital employed
Capital employed = Equity +
long-term liabilities

Gross profit margin

(%)

Net profit margin

(Profit from
Operations margin)
(%)

Tells us:
how much return on their
investment shareholders receive
from the business activities
Tells us:
how efficiently the company uses
its funds / resources to generate
a profit

Gross profit
Sales revenue

Tells us:
How much profit an organisation
makes on each sale

Profit from operations

Sales revenue

Efficiency
Asset turnover

Sales revenue
Capital employed

Non-current asset
turnover

Working capital
turnover

Sales revenue
Non-current assets
Sales revenue
Working capital

Tells us:
How efficiency an organisation
utilises its assets to generate
sales
The number of times per annum
that productive assets are
converted into sales

Average inventory
days

Average trade
receivables collection
period
(days)

Average payables
payment period (days)

Average inventory

x 365

Cost of sales

Average trade receivables x

365
Credit sales
Average trade payables

x 365

Credit purchases

Tells us:
How long goods in inventory take
to sell
Tells us:
How efficient an organisation is
at collecting money from
customers

Tells us:
How long it takes an organisation
to pay its suppliers

Solvency
Current ratio

Current assets
Current liabilities

Quick ratio
(Acid test)

Current assets inventory

Current liabilities

Tells us:
Ability to meet short-term
liabilities as they become due
May indicate potential cash flow
problems

Capital Structure
Gearing (%)

Non-equity finance
Capital employed

Interest cover

Profit from operations

Interest payable

Ordinary dividend
cover

Profit after taxation

attributable to ordinary
shareholders
Ordinary dividend

Tells us:
Organisations reliance on long
term debt
Benchmark is 50% (once an
organisation exceeds this, it is
seen as being a little too reliant
on LT debt)
Tells us:
Ability to pay each type of
investor/funder
Security of investment/loan

Investor
Earnings Per Share
(pence)

Price Earnings Ratio

Profit after taxation attributable

to ordinary shareholders
No. of ordinary shares

Market value of share

EPS

Dividend Yield (%)

Dividend per share

Market value of a share

Tells us:
Profit earned by each share in
issue
Tells us:
How many years it will take to
earn back the market value of one
share
Higher may better because it
means the stock market holds the
company in high regard
Tells us:
% return on investment