Debtors Turnover

Sales debtors

(580,000) (65,200) (= 9)

This shows that little over a month's credit is being taken by customers, who are clearly paying their bills promptly (assuming all customers are credit ones).


gross profit cost of sales

(77,000) (503,000) (= 15%)

Net profit ratio:

net profit sales

(57,000) (580,000) (= 8.9%)

For a processing company, not a retail distributing one, this is a satisfactory result.

Gross return on capital employed:

gross trading profit total capital employed

(77,000) (219,090) (= 35%)

Net return on capital employed:

net profit total capital employed

(51,500) (219,090) (= 23.5%)

Both these ratios indicate great efficiency. Net profit on working capital:

net profit working capital

(51,500) (139,090) (= 37%)

This indicates a very satisfactory use of working capital.

For other ratios, mainly of interest to shareholders, refer to Chapter 6.

Operating Ratios

Then comes the question of how efficiently the company is being run. Many indicators are available for this purpose and the following represent only the main ones used by most analysts. First we must define some new terms.

Shareholders' funds refers to the total nominal value of the issued ordinary shares, plus the reserves.

Capital employed refers to the total capital being used in the business, irrespective of who owns it. It therefore includes not only the total of ordinary shareholders' funds plus issued preference shares and debentures, if any, but also capital borrowed from... see: Operating Ratios

Personal And Business Finance 2013

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