Ratio – Analysis:
- Financial ratios: financial ratios can be calculated and used analyse the performance of business is more precisely. A financial ratio is one number divided by another or one number expressed as percentage of another. There are differnt types of ratio, which address different aspects of financial performance.
- gearing ratios: gearing ratio show the long-term financial position of the business. They can be used to show the relationship between loans and which interest is paid, and shareholders’ equity on which dividends might be paid. There are several different versions of the gearing ratio. 1 refers to the noncurrent liabilities of the capital employed. If not stated clearly, the capital employed can be determined by subtracting current liabilities from total assets. The formula is:
- Gearing ratio = (non-current liabilities / by capital employed) * 100%
- Interpret the gearing ratio: creditors are likely to be concerned about a firm gearing loans, for example, have interest charges that have to be paid. Dividend do not have to be paid to ordinary shareholders. As a business becomes more highly geared it is considered riskier by creditors. The owners of a business might prefer to raise extra funds by borrowing. They might not want to issue more shares and share control of the business.
- gearing ratios can be used to analyse the capital structure of a business. They compare the amount of capital raised from ordinary shareholders with that raised in loans this is important because the interest on loans is a fixed commitment, whereas dividends for ordinary shareholders are not. Gearing ratios can assess whether or not a business is burden by its loans. This is because highly geared companies must still pay their interests even when trading becomes difficult
- Profitability ratios: profitability of performance ratios how to show how well a business is doing. They tend to focus on profit, capital employed and revenue. The prophet figure alone is not useful performance indicator. Is necessary to look at the value of profit in relation to the value of the amount of money that has been invested in the business.
- return on capital employed roce: one of the most important ratio is used to measure the profitability of the business is a return on capital employed. This is sometimes referred to as the primary issue. It compares the prophet, i.e. Return, made by the business with the amount of money invested, i.e. its capital. The advantage of this ratio is that it relates profit to the size of the business. When calculating return on capital employed, it is standard practice define profit as operating profit i.e. net profit before tax and interest. This is sometimes described as earnings before interest & tax. Tax is not included because it’s determined by the government and therefore is outside of a firm’s control. Interested is excluded as it is not related to a business’s ordinary trading activities. The capital employed, if not state clearly, can be determined by subtracting current liabilities from total assets. Return on capital employed can be calculated using the following formula:
- return on capital employed = (operating profit / by capital employed) *100
- Interpreting return on capital employed: the return on capital employed will vary between industries. However, the higher the ratio the better.