AAT 4 FST Interpreting financial statements formulae Flashcards

Terms Definitions
Return on capital employed
Profit from operations / (Total equity + Non-current liabilities
Sentence: The key measure of a business' profitability. It measeures the profit that a business generates from the resources available to it.
Return on equity
Profit after tax / Total equity
Sentence: Also known as 'Return on shareholder's equity'
Return on total assets
Profit from operations / Total assets
Net profit margin
Profit from operations / Revenue
Sentence: Also known as 'Operating profit percentage'. Measures the overall profitability of a business
Gross profit margin
Gross profit / Revenue
Sentence: Also known as 'Gross profit percentage'. Measures gross profit as a percentage of sales.
Expenses ratio
Operating expenses / Revenue
Sentence: Also known as 'Expense/Revenue percentage' or 'Expenses/Sales'
Asset turnover
Revenue / (Total assets - Current liabilities)
Sentence: Measeures the efficiency with which a business uses its resources to generate sales.
Earnings per share
Profit after tax / Number of issued ordinary shares
Sentence: Measures the profit earned for each ordinary share.
Current ratio
Current assets / Current liabilities
Sentence: It shows the extent to which current liabilities are covered by either cash orassets that can be converted into cash within a reasonably short time.
Quick ratio
(Current assets - Inventories) / Current liabilities
Sentence: Also known as 'Acid test'. Measures the immediate solvency of a business by showing the extent to which its current liabilitieas are covered by cash and amounts receivable.
Inventory turnover
Cost of sales / Inventories
Sentence: Shows how rapidly a business's inventory is sold on average during the year.
Inventory holding period
(Inventories / Cost of sales) x 365
Sentence: The average days for which a business holds an item of inventory.
Trade receivables collection period
(Trade receivables / Revenue) x 365
Sentence: Also known as 'Receivables days'. The average period taken to collect receivables.
Trade payables payment period
(Trade payables / Cost of sales ) x 365
Sentence: Also known as 'Payables days'. The average period taken to pay suppliers.
Working capital cycle
Inventory days + Receivable days - Payable days
Sentence: Also known as 'Cash cycle' or 'Operating cycle'. The period of time from the point at which cash goes out of a business to pay for inventories and the point at which cash comes back into the business.
Gearing
Non-current liabilities / (Total equity + Non-current liabilities
Sentence: Measures non-current liabilities as a percentage of total financing.
Interest cover
Profit from operations / Finance costs
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