(Net Profit / Capital Employed) x 100
Is the return in relation to the
owners’ capital i.e. how well a
business is using its capital to generate
revenue.
The capital is the monies invested
into the business and must
include loan taken up by the company.
However, it is assumed that the
capital used is generally the
capital at the end of the accounting period.
Note:
-
For a
partnership account, the capital employed is the total of capital account and the current
account.
-
For a
limited company, the capital employed is the total of share capital, reserves and long
term borrowed fund.
However, capital
employed can exclude borrowed funds
(i.e. total capital + reserves)
(2)
Shareholders’ return
The return refers to the profit after
interest and dividends to preference shareholders.
The capital employed consists of ordinary
share capital, share premium, reserves and retained profit.
This means the loan from bank, debentures
and the preference share capital are excluded from the capital employed.
Gross
Profit as a percentage of sales = (Gross Profit / Sales) x 100
It measures the percentage of profit added
to the cost of sales
Net
Profit as a percentage of sales = (Net Profit / Sales) x 100
It measures the percentage of sales being
retained after deducting the cost of sales and all other operating costs.
(1)
Working Capital / Liquidity Ratio
Measures the difference between
the total current assets and the total current liabilities.
Measures the financial capability
of a company to meet its short term liability from its current assets.
Working Capital Ratio = Current Assets / Current Liabilities
It
measures the number of times the current liabilities are covered by the current
assets
Liquidity / Acid Test Ratio
It is working capital ratio, but
excludes stock.
The reason to this is because
stock will need to be converted into debtors and eventually into cash to the
business.
(1)
Asset Utilisation
Stock turnover
The number of times the stock is
replaced during an accounting period.
Cost of Sales / Average Stock = number of times
where the average stock =
(opening stock + closing stock) / 2
OR
Average stock / cost of sales
x 365 days / 12 months
Debtors’ Collection Period
Measure the average time it takes
for the business to collect from the debtors.
Debtors / Sales x 365
Creditors Settlement Period
Measures the average time a
company takes to pay the creditors
Creditors / Purchases
x 365
Sales to capital employed
Measures the amount of investment
needed to achieve the desired sales level.
Sales / Capital Employed =
X
IMPORTANT REMINDER
THIS IS TO PROVIDE STUDENTS A COURTESY REMINDER THAT THIS BLOG IS
CATERED
TO HELP ACCOUNTANCY STUDENTS AT BASIC LEVEL TO GAIN A QUICK SUMMARY OF
MAJORLY ALL THE BASIC COMPONENTS OF THE BOOK-KEEPING AND ACCOUNTING
STUDIES.
IT IS NOT MEANT TO PROVIDE A COMPLETE CONTENT OF THE SUBJECT MATTER.
THEREFORE, STUDENTS ARE ADVISED TO TAKE THIS INFORMATION RESOURCE AS A
SUPPLEMENTARY READING ONLY.
THIS READING MATERIAL IS ONLY A SUMMARY OF WHAT IS ESSENTIAL IN
GETTING A GOOD
UNDERSTANDING BUT NOT AN EXHAUSTIVE ONE OF THE RELATED TOPIC.
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