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Ratio Comparison of financial statement elements in the form of quotient Quick Ratio/Acid test ratio/Current ratio Current Assets

Current Liabilities One of the most universally known ratios, indicates the ability of a company to pay its short-term creditors from Liquidity Ratio Current Assets - Stock Current Liabilities This ratio indicates the ability of a company to pay its debts as they fall due. It is generally considered to be a more accurate assessment of a company's financial health than the current ratio as it excludes stock, thus reducing the risk of relying on a ratio that may include slow moving or redundant stock. Stock Financing Ratio Stock + Work in Progress Current Assets - Current Liabilities Compares stock and work in progress to working capital and therefore shows how sensitive working capital is to a fall in stock value. Solvency Ratio Shareholders Funds x 100 Total Assets This ratio measures if the total liabilities of a business (both secured and unsecured) are too high, indicating a possible over dependency on outside sources for long-term financial support. By comparing shareholders funds to total assets we can produce a confidence factor for unsecured creditors to the business. As a general rule, the higher the result the better, although results for new companies are distorted as the business would not have had the trading history to develop high levels of net worth Insolvency Ratio Shareholders Funds Loss Compares a company's losses to its shareholders funds, indicating (in years) the time it will take for the company to become insolvent due to lack of profit, rather than due to cash flow liability. It assumes that the company will continue to make the same losses. Stock/Turnover Turnover Stock Measures the number of times a company converts its stock into sales during the year. When examining this ratio it should be borne in mind that different companies will have varying levels of stock turnover depending on what they produce and the industry they operate in.

Asset Turnover Turnover Net Assets The asset turnover indicates how effectively a company utilises its investment in assets. It is a measure of how efficient the company has been in generating sales from the assets at its disposal. A low figure would suggest either poor trading Gearing Ratio (Long Term Borrowings + Short term Loans + Overdraft) - Cash x 100 Shareholders Funds Gearing is a comparison between the amount of borrowings a company has to its shareholders funds (net worth). The result of the calculation will show as a percentage the proportion of capital available within the company in relation to that owed to sources outside the company. Lower figures are more acceptable, showing that the company is predominantly financed by equity whilst high gearing shows an over reliance on borrowings for a significant proportion of the company's capital requirements. High gearing is significantly more dangerous at times of high or rising interest rates and also low profitability. Total Debt Current Liabilities + Long Term Liabilities Shareholders Funds This ratio compares total liabilities to shareholders funds. It is useful when considered over a period of time, i.e. in successive years' accounts. An increasing ratio would indicate that borrowing is making a higher contribution to the capital base of the business than shareholders funds. This may cause problems, particularly if profit margins are also in decline. Current Debt Current Liabilities Shareholders Funds This ratio compares current liabilities to shareholders funds and is a useful ratio when considered over a period of time, i.e. in successive years' accounts. An increasing ratio would indicate that borrowing is making a higher contribution to the capital base of the business than shareholders funds.

Shareholders Equity Shareholders Funds Long Term Liabilities Shows how many pounds worth of shareholders funds exist for every pound worth of long term debt. Credit Gearing Credit Limit x 100 Shareholders Funds

Expresses the suggested credit limit as a percentage of shareholders funds. Profit Margin (Return on Sales) Profit Before Tax x 100 Turnover Measures the margin of profitability on sales throughout the year. This is the main indicator when measuring the efficiency of the operation, a very good indicator of the business's ability to withstand falling prices, rising costs or declining sales. Profit/Capital Employed (Return on Capital Employed) Profit before Tax x 100 Total Assets - Current Liabilities This ratio measures whether or not a company is generating adequate profits in relation to the funds invested in it and is a key indicator of investment performance. A business could have difficulty servicing its borrowings if a low return is being earned for any length of time. In manufacturing we would expect to see figures in excess of 10% rising to over 25% at the top end. In retail lower figures would be experienced, ranging between 5% and 15%. Construction figures show an average of about 7% increasing to over 35% for the top performers. Employee Ratios The employee ratios show the productivity of the company's employees and can be of value if yearly fluctuations are examined within the same industry type. Profit/Employee: Profit Before Tax No. of Employees Sales/Employee: Turnover No. of Employees Capital Employed/Employee:: Total Assets - Total Liabilities No. of Employees Fixed Assets/Employee: Tangible Fixed Assets No. of Employees Shareholders Funds/Employee: Shareholders Funds No. of Employees Export/Employee: Export No. of Employees

Capital: Amount of cash and other assets owned by a business (accounts receivables, accumulated assets, ownership equity) Working Capital: Companys liquid assets (net amount of current assets and liabilities) Cost of Capital: Cost of debt: refers to cost of companys funds (both debt and equity) (rate of interest paid)

Cost of equity: (Risk free rate + premium expected risk rate) CAMP formula Additional paid Capital: The amount paid above its par value Contributed Capital: Total amount paid to business for common and preferred stock Lease: Grant of real estate, plant, machinery or other fixed assets on long term basis Lessor: Giving asset Lessee: Receiving asset

Finance/Capital Lease: Ownership transfers at the end of period without giving any payment to lessor. Lessee is responsible for all repairs, maintenance, and faults. Operating Lease: Ownership transfers at the end of the by giving payment to lessor on MV

Difference between capital and investment

Capital is the source of funds Recorded in liability side of BS on Cr. side

Investment is one of the arranged fund Recorded on asset side of the balance sheet on Dr. side

ACCOUNTING TERMS

Depreciation: Reduction in the value of an asset with the passage of time (deals with Tangible assets) Amortization: Same like depreciation but deals with Intangible assets Journal: (Initial entry book) record every transaction Ledger: (Final entry book) transactions are classified in individual accounts Bank reconciliation statement: comparing banks statements with books of accounts Trial balance: writing down the balance of main general ledger (e.g. cash, bank, major expenses) Balance Sheet: (deals with assets, liabilities and equity of the company) P&L a/c or Income statement: (deals with expenses and incomes) shows the performance of the company Tax return: a tax form that can be filled and return to the government Intangible assets: Goodwill, trademarks, copyright etc. Book value: assets current value for account purposes Budgeting: process includes income statement analysis, balance sheet analysis, cash flow st. Cash flow statement: (shows the used and generated cash) Common stock equivalents: (convertible preferred stock, stock option, warrants etc) Current assets: (convertible to cash easily) for example, cash, receivables, inventory, prepaid exp. Non-current assets: (Not convertible to cash easily) for example, goodwill, copyrights etc. Current liabilities: (Amount due) for example, payables, accrued expenses Non-current liabilities: (not due in accounting period) Debt: (money borrowed) Equity: (net value of company = assets liabilities) EPS: net income/no. of outstanding shares Gross margin: net sales cost of sales Leverage: (relationship b/w debt and equity) if debt side is higher means firm is more leverage Measurable securities: securities that can be easily converted into cash Mortgage: long term debt instrument to purchase property NPV (net present value): concept time value of money Net Sales: Gross sales credit sales discounts Operating expenses: ongoing operations expenses Overheads: fixed known expenses (excludes manufacturer expenses) Payroll/Salaries/Wages: wages excluding benefits Retained earnings: net income added in owners equity after paying dividends Salvage value: scrap value of an asset

Solvency: companys ability to pay its creditors Insolvency: companys inability to pay its creditors (in this case company is called insolvent) Useful Life: (period in which asset can be used) Fair value: An amount for which an asset can be exchanged between interested parties Common stock: (the share owned by the company itself) Current yield: (annual income/interest or dividend) Yield to Maturity: (when asset is mature with an expected return) CAPM: relationship between risk and expected return on investment Capital market: market for securities, where business can raise long term funds; two types below: Primary market: where newly issued bonds/stock issued to investors Secondary market: existing securities are bought and sold

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