Page 99 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes
Table 4.1: Key Financial Ratios, how they are calculated and what they show
Ratio How Calculated What It shows
Profitability ratios
1. Gross profit Sales – cost of goods sold An indication of the total margin
margin available to cover operating
Sales
expenses and yield a profit.
2. Operating profit Profits before taxes and An indication of the firm’s
margin (or return on ___before interest_____ profitability from current operations
sales) without regard to the interest
Sales
charges accruing from the capital
structure.
3. Net profit margin Profits after taxes Shows after tax profits per rupee of
(or net return on sales. Subpart profit margins
Sales
sales) indicate that the firm’s sales prices
are relatively low or that costs are
relatively high, or both.
4. Return on total Profits after taxes A measure of the return on total
assets Total assets investment in the enterprise. It is,
sometimes desirable to add interest
Or
to the after tax profits to form the
Profit after taxes + interest numerator of the ratio since total
Total assets assets are financed by creditors as
well as by stockholders; hence it is
accurate to measure the productivity
of assets by the returns provided to
both classes of investors.
5. Return on Profits after taxes A measure of the rate of return on
stockholders’ equity Total stockholders’ equity stockholders’ investment in the
(or return on net enterprise.
worth)
6. Return on capital Profits after taxes – Preferred A measure of the rate of return on
employed ____stock dividends_______ the total capital investment in the
Total stockholders’ equity + enterprise.
total debt – Par value of
preferred stock

7. Earnings per share Profits after taxes and after Shows the earnings available to the
__preferred stock owners of each share of common
dividends__ stock.
Number of shares of
common stock outstanding
Liquidity ratios
1. Current ratio Current assets Indicates the extent to which the
Current liabilities claims of short-term creditors are
covered by assets that are expected
to be converted to cash in a period
roughly corresponding to the
maturity of the liabilities.
2. Quick ratio (or acid Current assets – Inventory A measure of the firms ability to pay
test ratio) Current liabilities off short-term obligations without
relying on the sale of its inventories.
3. Inventory to net ______Inventory_____ A measure of the extent to which the
working capital Current assets – current firm’s working capital is tied up in
liabilities inventory.
Contd...

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