1. Profitable ratio
A profitable ratio is a measure of profitability, which is a way to measure a company’s performance. It is simply the capacity to make a profit is what is left over from income earned after you have deducted all cost and expenses.
Types of Profitable ratio’s:
1.1 Gross Profit to Sales Ratio
It is a ratio that shows the relationship between gross profit and total net sales revenue. The ratio is computed by dividing the gross profit figure by net sales. (Muro 1998, p. 491)
Gross profit margin = Gross Profit/ Net sales x 100%
Smithson Plc’s gross profit margin deteriorated from 2012 to 2013. In 2012, the Gross profit ratio shows 58.4% has dropped to 50.86%, which indicates that company’s gross profit is dropped by 7.54%.…show more content… The larger the acid test ratio, the more easily will the company be able to meet its current obligations.
It is calculated as
Quick/ Acid Test Ratio = Current Assets – Stock/ Current Liabilities
Smithson Plc, has done little better in terms of Acid test ratio. The ratio in 2012 was 1:18:1 and rose to 1:36:1 in the year 2013.
3. Gearing Ratio
The Gearing ratio is one of the fundamental ratios that are used everyday by financial analysts to understand the capital structure of a company. The higher gearing ratio means the company has to pay interest on an annual basis (higher than what’s normally paid by same companies in the sector)
3.1 Liabilities to Assets
The liabilities to assets ratio examines how much of the company’s assets are made of liabilities. The lower liabilities and higher assets is safer to the company.
It is calculated as
Total liabilities/ Total Assets x 100%
Looking at the Smithson Plc report, the liabilities to assets ratio shows 41.09% in 2012 and it rose to 47.84% in 2013 which is risky for the…show more content… The lower the better and the higher is risky.
Owners equity to assets ratio = Owners Equity/Total Assets x 100%
Looking at the Smithson Plc report, the owners equity to assets ratio shows 58.90% in 2012 and deteriorated to 52.15% in 2013.
3.4 Liabilities to Owners Equity
A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholder equity. It indicates what portion of equity and debt the company is using to finance its assets.
Liabilities to Owners equity = Total Liabilities/ Owners Equity x100%
Smithson Plc, did not do well in this ratio. The Liabilities to owners equity ratio shows 69.75% in the year 2012 and rose to 91.74% in 2013.
4. Efficiency Ratio
Efficiency ratio is also called Activity ratio measures how well companies utilize its assets to generate income. Efficiency ratios often look at the time it takes companies to collect cash from customer or the time it takes companies to convert inventory into cash. (Booth et al 2014, p.104) The types of Efficiency ratios are:
4.1 Stock Holding