Explanation:
Gross Profit Margin- This margin consists of using the two figures Gross profit and Sales to calculate a figure that will allow the business to know how much they make per pound they spent. For example if the gross profit margin was 70% then that means that for everu pound a business spends they make the pound and 70% more back. The higher the percentage the better for the business as it will mean they are making a higher return on what they have spent for the goods.
Net Profit Margin- This is the ratio that measure the profitability of the business after all costs have been covered. It is done by using the sales and net profit figure to see the differences between the two by percentage. The higher the percentage the better it is for a business as it shows that the net profit is close to their sales figure. Sales is nearly always greater than net profit, so having the net profit as close to the sales figures shows that the business are operating well.
Return on capital employed- This ratio is calculated by taking account the business’ net profit and capital employed to find out the return on capital employed. This ratio measures how efficient the business is with their capital employed. The higher the percentage the better it is for the business.
Current ratio- Current ratio is used to show how well the business is able to pay off their liabilities by calculating how much assets to liabilities they have. If a business has 2 assets for every liability they owe than that means that they are able to pay their liabilities and have money to reinvest into the business. A ratio of 1.5-2:1 is preferred as having too little means the business are unable to pay their liabilities and too high means they are keeping too much assets which is not being reinvested into the business to increase their profits.
Acid Test ratio- Similar to current ratio, acid test ratio is used to see how much assets to liabilities they have but acid test ratio excludes stock in the assets. Like I said for current ratio, the preferred ratio is still the same and with the same reasons why it’s the same.
Debtors Collection Period- This is the period it takes for the business’ debtors to pay them back in days within a year. The less days the better it is for a business, this is calculated by multiplying the total debtors by 365 (days) and divided by sales.
Credits Payment Period- Creditors payment period is the opposite of debtor’s collection period as this is how many days it takes you to pay back your creditors. Similar calculation, but you swap debtors with creditors and purchases with sales as purchases are what the business pays to a supplier.
Stock Turnover- Stock turnover is the amount of times the business had to restock to keep up with the demand for their goods. The higher the figure, the better it is for a business as it means that they aren’t holding on too stock for too long before needing to re-stock to keep up with demands.
Expenses to sales ratio- This ratio shows how much of the expenses is taken of the sales in a percentage. For example on the table above it shows 41% of sales goes to covering expenses cost, the less the percentage, the better it is for the business as it means that either their expenses is low or their sales are high.
Mark Up- Mark up is a ratio that shows the impact of cost of sales on the total of Gross Profit. If the percentage is high that means the cost of sales does not have a huge impact on sales, but if it is low then cost of sales are exceeding a level where the business must have it at. A business percentage may primary depending on the size of the business, maybe a small business will be happy with a percentage that a larger business wont.
KEY:
Average stock = Opening Stock + Closing Stock/2
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