Page 25 - Online Notes 2017 Flipbook_Neat

Operating Profit %
Operating Profit (P&L) = %
Sales (P&L)

What proportion of the sales revenue is left after paying all costs (except interest)?
Or, for every pound of sales, how many pence are left over after paying for all the costs apart from
interest?

Balance Sheet Ratios

Stock Days
Stock (B/S) x 365 = number of days
Cost of Sales (P&L)

How many days of sales do we have stocks to cover?
(i.e. how much stock have we got, relative to our sales level?)

Note that we use Cost of Sales rather than Sales (because our stock is stated at cost price
and therefore our sales should also exclude the profit we make on the sale)

Expect to see your stock days go up if you increase the range of your stock or if you suffer a slump
in your sales.

Creditor Days
Creditors (B/S) x 365 = number of days
Cost of Sales (P&L)

What is the average time we are taking to pay our suppliers?
(i.e. how high are our creditors, relative to our purchases level?)

For simplicity we tend to use the Cost of Sales figure rather than the total purchases for the
period (remember, the purchases do not appear in the P&L, since we include the cost of
stock when we sell it rather than when we buy it).

Gearing Ratio
Loan Capital (B/S) = %
Total Capital (B/S)

What is the proportion of Loan Capital to Total Capital (i.e. who is bearing the risk - the
shareholders or the lenders? )

The figure for Total Capital is the sum of the Loan Capital and the Shareholders’ Funds (i.e.
Share Capital plus Retained profit).

You may also see the Gearing Ratio calculated by dividing the Loan Capital by the
Shareholders’ Funds. This is more popular in the US and is also called “debt to equity”

A company is ‘highly geared’ if it has a high proportion of debt (say 40 or 50% based on the
first formula). High gearing may enable a company to expand faster but it exposes it to a
higher risk of defaulting on interest payments.

At the start of the game each pub has gearing of 20%, £100,000 of loan capital from a total of
£500,000 tied up in the business.

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