F1 7 Financial ratios

In this section…

In this section we shall look at how financial ratios can be calculated using information taken from financial statements and how these ratios can improve our understanding of a company’s performance and risk.

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7.01 Financial ratios
  • Interpretation of financial statements
  • Types of ratios
  • Taking care when using ratios

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7.02 Profitability ratios: profit and expenses percentages
  • Gross profit percentage
  • Operating profit percentage
  • Specified expense percentage

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7.03 Profitability ratios: ROCE and ROSF
  • Return on capital employed
  • Return on shareholders’ funds

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7.04 Liquidity ratios
  • Current ratio
  • Quick ratio or Acid test ratio

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7.05 Use of resources ratios: working capital
  • Inventory turnover
  • Inventory holding period (days)
  • Trade receivables collection period (days)
  • Trade payables payment period (days)
  • Working capital cycle (days)

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7.06 Use of resources ratios: asset turnover
  • Asset turnover (net assets)
  • Asset turnover (non-current assets)

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7.07 Financial position ratios
  • Interest cover
  • Gearing

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7.08 Commenting on ratios
  • Comment on all the ratios
  • Make qualitative statements
  • Explain what the ratio means
  • Put the ratios into context
  • Recommendations

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7.09 Commenting on ratios – questions
  • Questions requiring written analysis of financial ratios
  • Suggested answers to the questions

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