ACCA AFM Syllabus A. Role Of The Senior Financial Adviser - Ratios and Strategy - Notes 1 / 9
Accounting Ratios
In your exam, you may be required to calculate some ratios.
This section shall only present a summary and list of ratios that could potential be used in your exam for such purpose.
Ratios may be divided into the following categories:
PROFITABILITY RATIOS
These are measures of value added being generated by an organisation and include the following:
ROCE Operating Profit (PBIT)/Capital Employed Capital Employed Equity + LT liabilities Capital Employed Non current assets + net current assets Capital Employed Total assets - current liabilities Gross margin Gross Profit/Sales Net Margin Net Profit/Sales ROE Profit After Tax - Preference dividends/Shareholders’ Funds (Ordinary shares + Reserves) RI Profit After Tax - (Operating Assets x Cost of Capital) EFFICIENCY RATIOS
These are measures of utilisation of Current & Non-current Assets of an organisation. Efficiency Ratios consist of the following:
Asset Turnover Sales/Capital Employed ROCE Margin X Asset Turnover Receivables Days (Receivables Balance / Credit Sales) x 365 Payables Days (Payable Balance / Credit Purchases) x 365 Inventory Days (Inventory / Cost of Sales) x 365 LIQUIDITY & GEARING RATIOS
Liquidity Ratios measure the extent to which an organisation is capable of converting assets into cash and cash equivalents.
On the other hand, Gearing Ratios measure the dependence of an organisation on external financing as against shareholder funds.
Liquidity and Gearing Ratios are outlined below:
Liquidity Current Ratio Current Assets / Current Liabilities Quick Ratio (Current Assets – Inventory) / Current Liabilities Gearing Financial Gearing Debt/Equity Financial Gearing Debt/(Debt + Equity) Operational gearing Contribution / PBIT INVESTOR'S RATIOS
These ratios measures return on investment generated by stakeholders. Such ratios include:
Dividend Cover Profit After Tax / Total Dividend Dividend Yield Dividends per share / Share price Interest Cover PBIT / Interest Interest yield (coupon rate / market price) x 100% Earnings Per Share Profit After Tax and preference dividends / Number of Shares PE Ratio Share Price / EPS In the exam you have to act like a detective.
You have to sift through evidence and extract meaningful messages for effective business decisions.
The starting point is often the basic accounting documents that record the progress of any business, the Income statement & SFP
These are closely related and so need reading together.
The balance sheet is a snapshot of a business at one point in time.
The income statement is dynamic and describes the flow of money through the business over a period of time.