19.2 Ratios calculation
　　a. Profitability
　　The primary measure of profitability is normally considered to be Return on Capital Employed (ROCE) = Net profit / Capital employed
　　(Profit before interest and tax/ shareholder funds plus long-term borrowing ) x 100%
　　1)Gross and net profit margin % : PBITProfit (gross or net )/Sales x 100%
　　2)Asset utilization:Sales / net assets
　　1)PBIT (Gross or net profit) as a percentage of sales
　　PBIT x 100%
　　Sales
　　The value of the ratio is that it measures the company’s success in earning profit from its operations. But the figure for one year is of little value, we need the corresponding percentages for earlier years, or data from other similar companies.
　　2)Asset utilization
　　Sales x 100%
　　Net assets
　　The asset turnover ratio measures the ability of a company to use its assets to generate sales, it measures the efficiency of a company in employing its assets. The high sales, the more efficiency in employing its assets.
　　3)Return on capital employed (ROCE)
　　People who invest their money in a business are interested in the return the business is earning on that capital. This ratio is a key measure of return, it measures the amount of earnings generated per $1 of capital, an usually stated as a percentage.
　　The ratio depends on what is meant by the two terms “ capital employed” and “return.”
　　This is probably the most important single ratio, but it is open to manipulation. For example, an improvement in the ROCE is either because of improved margins or better use of assets. Increases maybe due to increase in selling price or reduction in manufacturing (or purchased) costs. They may also be caused by changes in sales mix or stocktaking errors. A change in the net profit margin is a measure of how well a company has collected overheads. The asset utilization ratio ( sales /net assets) shows how efficiently the assets are being used.
　　4)Return on equity
　　Profit after tax x 100%
　　Shareholder’s equity
　　The amount of net incomereturnedas a percentageof shareholders equity.Return on equitymeasures a corporation's profitabilityby revealing how muchprofit a company generateswith the money shareholders have invested.
　　b. Liquidity / working capital
　　Two main ratios measure a company’s ability to pay its debts.
　　Current ratio (also known as working capital ratio)
　　Current assets
　　Current liabilities
　　Quick ratio (also known as the liquid ratio or acid test)
　　Current asset – stocks
　　Current liabilities
　　Quick assets are current assets that can be realized into cash within the time allowed for payment of current liabilities. Quick assets are normally taken to be current assets other than stock.
　　In considering how to interpret the liquidity ratios, let us begin with quick ratio. If the quick ratio is less than 1:1 we can almost be certain that the company is going to have trouble in paying its creditors as they fall due, unless it has an unused bank overdraft facility.
　　One important thing to bear in mind, is that liquidity ratios vary greatly from industry to industry. An efficient retailer, for example, may well have a current ratio of a little more than 1:1, perhaps 0.5:1, an average manufacturing company might have a current ration of around1.5:1.
　　Working capital
　　Ratios in this area attempt to appraise the efficiency of management in controlling the main elements of working capital – stock, debtors and creditors.
　　Stock turnover
　　This ratio tells us how many times the stock of finished goods is replenished a year. It is either:
　　Cost of goods sold = Average No. of times stock is
　　Average stock replenished in a year
　　Or:
　　Average stock X 365 days = Average No. of days stock is
　　Cost of goods sold hold
　　Generally the higher the inventory turnover is the better, but several aspects of inventory holding policy have to be balanced.
　　Debtors collection period
　　Debtors days = Average trade debtors x 365 days
　　Credit sales
　　The trend of the collection period over time is probably the best guide. If the collection period is increasing year on year, this is indicative of a poorly managed credit control function ( and potentially therefore a poorly managed company.)
　　2012年ACCA考試《F3財務(wù)會計》講義輔導(dǎo)(74)
　　Creditors payment period
　　Creditors days = Average trade creditors x 365 days
　　Credit purchases
　　Often, suppliers request payment within 30 days. If company taking nearly three months, trade payable are thus financing much of the working capital requirements of the enterprise which is beneficial to the company in some ways. However, there are several disadvantages of extending the credit period.
　　c. Gearing
　　One very important financial ratio to consider is gearing, sometimes referred to as leverage. Gearing ratios measure the extent to which a company’s operations are financed by loan capital, preference shares and possibly short-term borrowings as opposed to equity capital. One common way of expressing gearing is by using the debt/equity ratio.
　　Debt/equity ratio = Debts x 100%
　　Equity
　　Or = Debts x 100%
　　Equity + Debts
　　A highly geared company (one with a large proportion of its total capital provided by loans or debentures, etc) is more vulnerable to a downturn in profits, because the interest charges must be paid regardless of profit. Conversely when profits are high, the equity shareholders benefit disproportionately, because the interest charges remain fixed despite the high profit.
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　　d. Investors’ returns
　　These are the ratios which help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of a company. The ordinary shareholders are interested in the return obtained by the use of their funds. To measure this we may use the following ratios, some based on dividends while others based on earnings. They are:
　　- Earnings per share
　　- Dividend cover
　　- P/E ratio
　　- Dividend yield
　　- Interest cover
　　●EPS = Profit after tax and preference dividends
　　Total ordinary dividends
　　EPS represents the portion of a company's earnings that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term.
　　●Dividend cover = Profit after tax and preference dividend x 100%
　　Total dividend
　　The dividend cover tells us what proportion of earnings a company normally pays out as dividend, and how easy it will be for the company maintain the dividend should earnings fall.
　　●Price/ earnings (P/E) ratio
　　P/E ratio = Market price per share
　　Earnings per share
　　The P/E ratio measures the price at which investors are prepared to pay for the share of the company, based on the company’s perceived future earning prospects.
　　●Dividend yield = Dividend on the share for the year x 100
　　Current market value of the share (ex div)
　　Dividend yield is the return a shareholder is currently expecting on the shares of a company.
　　(a)The dividend per share is taken as the dividend for the previous year.
　　(b)Ex-div means that the share price does not include the right to the most recent dividend.
　　●Interest cover = Profit before interest and tax
　　Total interest
　　This ratio indicates the ability of the company to service debt.