Gross profit margin (Profitability)
(Gross profit / Revenue) × 100
Measures % of revenue left after cost of sales.
High = good control over costs/prices. Low = rising costs or falling selling prices.
Gross profit mark-up (Profitability)
(Gross profit / Cost of sales) × 100
Shows % profit added to cost of sales.
High = strong pricing power. Low = thin margins due to competition or higher costs.
Profit in relation to revenue (Profitability)
(Profit for the year before tax / Revenue) × 100
Overall profit made per £1 of sales after all expenses.
High = strong profitability and cost control. Low = high expenses reducing profit.
Expenses in relation to revenue (Profitability)
(Expenses / Revenue) × 100
Shows % of revenue spent on operating expenses.
High = poor cost control (bad for profit). Low = good expense management.
Return on Capital Employed - Sole trader (Profitability)
(Profit before interest / Capital employed) × 100
Capital employed = Capital + Non-current liabilities
Measures return on long-term capital invested.
High = efficient use of capital (good). Low = poor return on owners’ investment.
Return on Capital Employed - Limited company (Profitability)
(Profit from operations / Capital employed) × 100
Capital employed = Equity + Non-current liabilities
Measures efficiency of long-term funds in generating operating profit.
High = strong performance. Low = capital not being used effectively.
Current ratio (Liquidity)
Current assets / Current liabilities (x : 1)
Ability to pay short-term debts using current assets.
High (>2:1) = good liquidity (but possibly idle assets). Low (<1.5:1) = risk of cash flow problems.
Liquid capital ratio (Acid test / Quick ratio) (Liquidity)
(Current assets – Inventory) / Current liabilities (x : 1)
Stricter test of short-term liquidity without inventory.
High (≈1:1 or above) = strong liquidity. Low (<1:1) = potential difficulty paying debts quickly.
Rate of inventory turnover (Efficiency)
Cost of sales / Average inventory
Number of times inventory is sold and replaced per year.
High = efficient stock control and strong demand. Low = slow-selling or overstocked inventory.
Rate of inventory turnover in days (Efficiency)
(Average inventory / Cost of sales) × 365
Average number of days inventory is held.
High = poor (stock held too long). Low = good (quick turnover).
Trade receivable days (Efficiency)
(Trade receivables / Credit sales) × 365
Average days to collect payment from credit customers.
High = slow collection (cash flow problems). Low = fast collection (good cash flow).
Trade payable days (Efficiency)
(Trade payables / Credit purchases) × 365
Average days taken to pay suppliers.
High = improves cash flow (but may damage supplier relations). Low = pays suppliers quickly.
Capital gearing (Gearing)
(Non-current liabilities / (Share capital + Reserves + Non-current liabilities)) × 100
Proportion of long-term funding from debt vs equity.
High (>50%) = higher financial risk due to interest payments. Low = lower risk, more stable.
Earnings per share (Investor)
(Profit after tax in pence) / Number of issued ordinary shares
Profit earned for each ordinary share.
High = more attractive to shareholders. Low = weaker earnings per share.
Dividend cover (Investor)
(Profit after interest and tax / Ordinary dividends paid)
How many times profit covers the dividends paid.
High = sustainable dividends (good). Low (near 1) = high payout, less sustainable if profits fall.
Dividend yield (Investor)
(Dividend per share / Market price per share) × 100
Annual dividend as a % of current share price.
High = good income return for investors. Low = lower dividend income.
Interest cover (Investor)
(Profit before interest and tax / Interest payable)
How easily the business can pay interest charges.
High (>3–4 times) = comfortable, low risk. Low (<2 times) = higher risk of financial difficulty.
