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Chapter 4 3 4

Performance

Ratio Formula Interpretation

Assess profitability before
Gross profit Gross profit taking overheads into
margin Revenue × 100% account

Assess profitability after
Operating profit
Operating margin × 100% taking overheads into
Revenue account

Short term liquidity

Ratio Formula Interpretation

Assess ability to pay
Current assets
Current ratio current liabilities from
Current liabilities current assets

Assess ability to pay
Current assets excluding inventory
Quick ratio current liabilities from
Current liabilities reasonably liquid assets

Efficiency

Ratio Formula Interpretation

Trade receivables Trade receivables Assess the average time
taken to collect cash from
collection period Revenue × 365 credit customers

Inventory holding Inventory Assess the average length
period Cost of sales × 365 of time inventory is held

Trade payables Trade payables Assess the average time
payment period Purchases × 365 taken to pay suppliers

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