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Chapter 14

1.3 Ratio analysis

A comprehensive analysis of performance will cover the following four
areas: profitability, liquidity, gearing and stock market ratios.

Key ratios

Liquidity ratios

Profitability ratios Current ratio = CA / CL

Return on capital employed (ROCE) Debtor days
= (EBIT / capital employed)×100% = (Receivables / Cr sales)×365
Creditor days
Asset turnover = (Payables / Cr purchases)×365
= revenue / capital employed Inventory holding period
= Inventory / Cost of sales)×365
Profit margin
= (EBIT / revenue)×100% Cash operating cycle
= Debtor days + Inventory holding
period – Creditor days

Stock market ratios
Gearing ratios
(if the entity is listed)
SOFP gearing:
Debt value/Equity value, or P/E ratio = Share price / EPS
Debt value/(Value of equity + debt) Dividend cover

P&L gearing: = EPS / Dividend per share
Interest cover = EBIT / Interest
(Finance charges) Dividend yield
= Dividend per share/Share price

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