Ratios

Gross Profit Margin

GPM = [Gross Profit / Sales Turnover (Revenue)] x 100

Gross profit is the money received for sales or services minus the costs of selling them.

Sales turnover is the total amount of money the company receives from their sales.

This ratio is expressed as a percentage and should be compared to other years and businesses.

If the percentage increases, prices have either gone up or costs of good bought have been reduced.

Net Profit Margin

NPM = [Net Profit / Sales Turnover (Revenue)] * 100

The higher the percentage, the better for the business. This is lower than the gross profit margin because of all other expenses that have been deducted.

Net profit is all the revenue made by the business minus all the expenses.

This is also expressed as a percentage and again should be compared to other years and businesses.

Current Ratio

Current Ratio = Current Assets / Current Liabilities

This ratio states if the business does or does not have enough resources to pay its debts in the next 12 months. Also known as liquidity ratio.

Current assets are assets which are expected to be sold or used up within a year. Some examples of current assets are cash, stock and short-term investments.

Current liabilities are liabilities that will be dealt within a year. Examples of these are short-term loans and goods or services that have not yet been paid for.

If the current assets would be $50,000 and the current liabilities $25,000, the current ratio would be 2:1. A ratio of 2:1 is generally acceptable, but it may vary between different businesses.

Acid Test Ratio

Current Assets - Stock / Current Liabilities

This statement measures whether or not a business is able to pay off all current liabilities directly. The amount of assets is not taken into account with the acid test ratio. Also known as quick ratio.

Marketable securities are securities that can easily be turned into cash very quickly. These can easily be sold from one investor to the other, and include securities such as stocks.

Accounts receivable is money owed to the business by a customer on credit for services or goods.
Generally, the acid test ratio should be 1:1 or higher, but it differs for every business.


Return on Capital Employed

ROCE = Profit Before Interest and Tax / Total Capital Employed

This is used to asses whether a business earns enough money to be able to pay for its cost of capital. It calculates the profitability of a business’ capital investment. This should be compared to other years and businesses.

Capital employed equals the total assets minus the current liabilities

Return on capital employed is expressed as a percentage.

Balance sheet

Balance sheet

The balance sheet is basically a summary of financial condition of the business at a certain time. At any time the assets (anything the business owns which is worth something) must equal the liabilities and the owner’s equity. Liabilities are claims of creditors against the assets of a business. Owner’s equity is made up of investments into the business and retained earnings. The balance sheet is usually shows multiple years so it can easily be compared. Yes, I know it’s boring…

The first thing put on the balance sheet is the current assets. These includes things such as cash, accounts receivable (money owed to the business for purchases), and notes receivable (promise to be given money in the future). These assets can be easily converted to cash within one year.

Then fixed assets are added, these include things like land, machinery and vehicles.

After that, intangible assets are put onto the amazingly boring list. For example, goodwill or trade names.

Any other assets will be added that cannot be classified in any of the above.

All the above assets should be added together to make the net assets.

On the other side of the balance sheet, we have to list all the liabilities and the owner’s equity. Firstly we start with the current liabilities. These are liabilities which can be paid for within a year. Some examples are wages, tax, interests and accounts payable(money owed to other businesses for purchases).

The balance sheet should include the working capital, which is the current assets minus the current liabilities.

Next up are long term liabilities, the debts the business has to pay after at least a year.

After that we finally add the shareholders’s equity, this is all the money which has been invested into the businesses and the remained profit which has been kept in the business.

When that’s all done, we sum up all the liabilities and stockholder’s equity, which if done right, should be equal to the total assets. This is known as the capital employed.

Exampled of balance sheet layout:



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