356 Accounting: Business Reporting for Decision Making
Key terms
Activity cycle (operating cycle) The length of time it takes for an entity to acquire goods, sell them to
customers and collect the cash from the sale.
Asset efficiency ratios Measures of the efficiency with which an entity manages its current and non-
current assets, and converts its assets decisions into sales dollars.
Asset turnover ratio Asset efficiency ratio calculated as sales revenue divided by average total assets.
Capital structure An entity’s financing decisions (i.e. how it finances its investments in assets).
Capital structure ratios Gearing ratios that measure how an entity finances its investments in assets.
Cash cycle The period of time that elapses between paying for the inventory, selling the inventory and
receiving cash for the inventory.
Cash flow ratio Measure of liquidity calculated as cash from operating activities divided by current liabilities.
Cash flow to sales ratio Measure of profitability calculated as cash from operating activities divided
by net sales revenue.
Current ratio (working capital ratio) Liquidity ratio calculated by dividing current assets by current
liabilities.
Days debtors Debtor efficiency ratio calculated by dividing the average trade debtors balance by sales
revenue and multiplying by 365 days.
Days inventory Inventory efficiency ratio calculated as the average inventory balance divided by cost
of sales and multiplied by 365 days.
Debt coverage ratio Capital structure ratio calculated as non-current liabilities divided by cash from
operating activities.
Debt ratio Capital structure ratio calculated by dividing total debt by total assets.
Debt to equity ratio Capital structure ratio calculated as total liabilities divided by total equity.
Dividend payout ratio Market performance ratio calculated as dividend per share divided by earnings
per share.
Dividend per share (DPS) Market performance ratio calculated as ordinary dividends paid or
provided out of current year’s profits divided by the number of ordinary shares on issue.
Earnings per share (EPS) Market performance ratio calculated as profit divided by the weighted
average ordinary shares.
Efficiency ratios Measure of sales generated per dollar invested in assets.
Equity ratio Capital structure ratio calculated by dividing total equity by total assets.
Expense ratio Profitability ratio calculated as expenses divided by sales revenue.
Financial analysis Analysing reported financial numbers to form opinions as to the entity’s past and
future performance and position.
Flow item Item in the financial statements that is generated over a period of time.
Fundamental analysis Analysing many aspects of an entity to assess the entity.
Gross profit margin Profitability ratio calculated as gross profit divided by sales revenue.
Horizontal analysis Analysing a series of financial statement data over a period of time.
Interest coverage ratio (times interest earned) Capital structure ratio calculated as EBIT divided by
net finance costs.
Liquidity Ability of an entity to meet its short-term financial commitments.
Liquidity ratios Measure of the short-term ability of the entity to pay its maturing obligations and to
meet unexpected needs for cash.
Market performance ratios (market test ratios) Ratios that generally relate the entity’s financial
numbers to the entity’s share price.
Net tangible asset backing (NTAB) per share Market performance ratio calculated as tangible assets
divided by the number of issued shares.
Operating cash flow per share (CFPS) Market performance ratio calculated as cash flows from
operating activities divided by weighted average ordinary shares on issue.