Dividends Dividends are monies distributed to shareholders.
Retained Profit Retained profit is money available for distribution after all expenses have
been met.
Depreciation Depreciation is a non-cash allowance made notionally to replace assets
as they are used by the firm in the year.
Exports Exports comprise sales made abroad.
Director Remuneration Director remuneration includes salaries, pensions and expenses paid
to the directors. When reading the profit & loss statement for smaller
companies, it is important to be aware of director remuneration since
profit can be taken as wages rather than dividends.
Employee Remuneration This includes director and employee salary, PAYE and other
withdrawals.
Definition Of Ratios
Profitability Ratios Profitability ratios measure financial efficiency.
Gross Profit Margin (%) Gross Profit x 100%
Turnover
Operating Profit Margin (%) Operating Profit x 100%
Turnover
Profit Before Interest & Tax Margin (%) Profit Before Interest & Tax Margin (%) x 100%
Turnover
Pre-tax Profit Margin (%) Pre-tax Profit x 100%
Turnover
Return on Total Assets (%) Profit Before Interest & Tax X 100%
(Total Fixed Assets + Total Current Assets)
Return on Equity (%) Profit After Tax X 100%
Shareholder Funds
Liquidity Ratios Liquidity ratios measure the degree of financial risk.
Current Ratio Current Assets
Current Liabilities
The current ratio is the most commonly used measure for short term
solvency. It indicates the extent to which short term claims by creditors
(ie current liabilities) are covered by current assets. Normally, a firm is
expected to collect payment from its customers (ie debtors) and pay
its suppliers (ie creditors) within the same time frame. The current ratio
measures the extent to which this can be accomplished.
Quick Ratio (Acid Test) Current Assets - Stock
Current Liabilities
The quick ratio measures a firm's ability to pay off its current liabilities.
This is a harsher measure of a firm's liquidity than current ratio. Since
50 | Chapter Five Terms & Ratios
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