ACCOUNTING RATIOS

1.  Mark up: is the gross profit measured as a percentage of the cost price; this is the amount added to the cost price to determine the selling price. 

            

Mark up = Gross profit x 100                    Cost of sales

Margin: is the gross profit measured as a  percentage of the Selling price.

Gross profit ratio = Gross profit x100                                  Sales

                                      

Cost price + gross profit = Selling price

2.  Rate of Stock turn over: this is the number of times a business replaces its stock in a given period.

Rate of stock turn over = cost of goods sold                                           Average stock Average stock = opening stock + closing stock                                                 2

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It is sometimes necessary to calculate a missing figure in a trading account

3. Return on capital employed:  This is the measure of the profit as a percentage of the amount invested in the business in order to  

    earn that profit.

ROEC  =   Net profit                  Capital employed

Capital employed: to be the total of the capital owned and long term liabilities.
 

4.  Current Ratio: is sometimes known as the working capital ratio.

Current ratio =  Current assets                           Current liabilities

Note:  Anything between 1.5:1 and 2:1 may be regarded as satisfactory.  A ratio over 2:1 may imply poor management of current assets.

5.  Quick ratio or Acid Test ratio:  It compares the assets which are in money form or which will convert into money quickly with the liabilities due for payment in the near future.

Quick ratio  =  Current Assets – Stock                         Current liabilities

Note:  A ratio of 1:1 is usually regarded as satisfactory.

6.  Net profit ratio

Net profit ratio  =  Net profit x 100                                     Sales