dictionary of financial formulas and ratios pdf Wednesday, March 31, 2021 12:51:18 AM

Dictionary Of Financial Formulas And Ratios Pdf

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Ratio analysis is the process of comparing and quantifyingrelationships between financial variables, such as those variables foundin the statement of financial position and income statement of acompany. The ability to carry out effective ratio analysis and to be able tointerpret the meaning of ratios is fundamental to the F9 syllabus.

Company Filings More Search Options. If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. This brochure is designed to help you gain a basic understanding of how to read financial statements. Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this brochure will explain how to read the basic parts of a financial statement.

Ratio analysis

It will also be regularly used by successful candidates in their future careers. The syllabus categorises ratios into four headings: profitability, liquidity, activity and gearing. Profit is necessary to give investors the return they require, and to provide funds for reinvestment in the business.

Three ratios are commonly used. Return on capital employed Return on capital employed sometimes known as return on investment or ROI measures the return that is being earned on the capital invested in the business. Candidates are sometimes confused about which profit and capital figures to use.

What is important is to compare like with like. Operating profit profit before interest represents the profit available to pay interest to debt investors and dividends to shareholders.

By similar logic, if we wished to calculate return on ordinary shareholders funds the return to equity holders , we would use profit after interest and tax divided by total equity. A return on capital is necessary to reward investors for the risks they are taking by investing in the company. Generally, the higher the ROCE figure, the better it is for investors. It should be compared with returns on offer to investors on alternative investments of a similar risk.

Return on sales Return on sales sometimes known as operating margin looks at operating profit earned as a percentage of revenue. Again, in simple terms, the higher the better. Poor performance is often explained by prices being too low or costs being too high. The asset turnover ratio is discussed later.

They are considered at the same time because:. This relationship can be useful in exam calculations. This is more than a mathematical trick.

Gross margin Return on sales looks at profits after charging non-production overheads. Once again, in simple terms, the higher the better, with poor performance often being explained by prices being too low or costs being too high. Current ratio The current ratio compares liabilities that fall due within the year with cash balances, and assets that should turn into cash within the year.

Traditionally textbooks tell us that this ratio should exceed 2. However, acceptable current ratios vary between industrial sectors, and many companies operate safely at below the level.

A very high current ratio is not necessarily good. It could indicate that a company is too liquid. A high ratio could also indicate that the company is not making sufficient use of cheap short-term finance. Acid test The acid test or quick ratio recognises that inventory often takes a long time to convert into cash.

It therefore excludes inventory values from liquid assets. Traditionally textbooks tell us that this ratio should exceed but once again many successful companies operate below this level. A healthy cashflow will often compensate for weak liquidity ratios. They measure the efficiency of the business in managing its assets. Asset turnover This measures the ability of the organisation to generate sales from its capital employed. Generally the higher the better, but in later studies you will consider the problems caused by overtrading operating a business at a level not sustainable by its capital employed.

Commonly a high asset turnover is accompanied with a low return on sales and vice versa. For liquidity purposes the faster money is collected the better. Also, generally, the longer customers are given to pay, the higher the level of bad debts. Inventory days This is calculated in a very similar way to receivable days. It measures how long a company carries inventory before it is sold. Again for liquidity purposes the shorter this period the better, as less cash is tied up in inventory.

Also long inventory holding periods can result in obsolete inventory. On the other hand, too little inventory can result in production stoppages and dissatisfied customers. Payables days Once again this is calculated in a similar way to receivable days.

Because the purchases figure is often not available to analysts external to the business, the cost of sales figure is often used to approximate purchases. Payable days measures the average amount of time taken to pay suppliers.

Two ratios are commonly used. Capital gearing Also known as leverage. Many different definitions exist; the two most commonly used ones are given above. When necessary in the exam, you will be told which definition to use. A large proportion of borrowed capital is risky as interest and capital repayments are legal obligations and must be met if the company is to avoid insolvency. The payment of an annual equity dividend on the other hand is not a legal obligation.

Despite its risks, borrowed capital is attractive to companies as lenders accept a lower rate of return than equity investors due to their secured positions. Also interest payments, unlike equity dividends, are corporation tax deductible. Levels of capital gearing vary enormously between industries. Companies requiring high investment in tangible assets are commonly highly geared. Consequently, it is difficult to generalise about when capital gearing is too high.

However, most accountants would agree that gearing is too high when the proportion of debt exceeds the proportion of equity. Interest cover This is sometimes known as income gearing. The higher the figure, the more likely a company is to be able to meet its interest payments. Anything in excess of four is usually considered to be safe.

Written by a member of the management accounting examining team. Ratio analysis. Section Menu Close. Liquidity This measures the ability of the organisation to meet its short-term financial obligations. Two ratios are commonly used: 4. Activity ratios 6.

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Financial Glossary

It will also be regularly used by successful candidates in their future careers. The syllabus categorises ratios into four headings: profitability, liquidity, activity and gearing. Profit is necessary to give investors the return they require, and to provide funds for reinvestment in the business. Three ratios are commonly used. Return on capital employed Return on capital employed sometimes known as return on investment or ROI measures the return that is being earned on the capital invested in the business. Candidates are sometimes confused about which profit and capital figures to use. What is important is to compare like with like.

Moving average convergence divergence, or MACD, is one of the most popular tools or momentum indicators used in technical analysis. This was developed by Gerald Appel towards the end of s. This indicator is used to understand the momentum and its directional strength by calculating the difference between two time period intervals, which are a collection of historical time series. Management buyout MBO is a type of acquisition where a group led by people in the current management of a company buy out majority of the shares from existing shareholders and take control of the company. For example, company ABC is a listed entity where the management has a 25 per cent holding while the remaining portion is floated among public shareholders.

Gearing Ratio

Financial ratio analysis is performed by comparing two items in the financial statements. The resulting ratio can be interpreted in a way that is more insightful than looking at the items separately. Here is a list of various financial ratios. Each ratio is briefly described. Evaluates how much gross profit is generated from sales.

There are dozens of financial ratios and their meanings help business owners evaluate the financial health of a company. Financial ratios can be broken into six key areas of analysis: liquidity, profitability, debt, operating performance, cash flow and investment valuation. Interpreting financial ratios requires understanding income statements and balance sheets. The ratios derived in financial reports for a company are used to establish comparisons either over time or in relation to other data in the report. A ratio takes one number and divides it into another number to determine a decimal that can later be converted to a percentage, if desired.

Financial ratio

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It is most commonly calculated by dividing total debt by shareholders equity. Alternatively, it is also calculated by dividing total debt by total capital i. As interest expense is tax deductible in most jurisdictions, a company can magnify its return on equity by increasing the proportion of debt in its capital structure. This is a consequence of Modigliani and Miller propositions.

Home What Is What is. FE Knowledge Desk - Dec 10, FE Knowledge Desk - Dec 03, Sessions Court definition: In India, the Court of Sessions, commonly referred to as Sessions Court, has been established by the state government for every sessions division and it is presided over by FE Knowledge Desk - Dec 02, It ensures that the right amount of force is applied to each wheel. FE Knowledge Desk - Dec 02, Protem Speaker definition: There are several instances when the Supreme Court had to issue orders directing a Protem Speaker to be appointedin a state legislative assembly to carry out specific functi FE Knowledge Desk - Nov 26,


Bragg, Steven M. Business ratios and formulas: a comprehensive guide / Steven M. Bragg. and finance functions, Chapters 9 through 12 are more concerned with such issues as work The book concludes with an appendix and glossary.


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A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting , there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders owners of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. Ratios can be expressed as a decimal value , such as 0.

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