380 Accounting: Business Reporting for Decision Making
APPENDIX 8A
Summary of ratios
Ratio Calculation InterpretationProfitability ratiosReturn on equity
(ROE)Profit available to owners
× 100
Average equityMeasures the rate of return earned on
equity provided by ownersReturn on assets
(ROA)Profit (loss)
× 100
Average total assetsMeasures the rate of return earned as a
result of investment in assetsGross profit
marginGross profit
× 100
Sales revenueMeasures gross profitability per dollar
of sales revenueProfit margin Profit (loss)
× 100
Sales revenueMeasures net profitability per dollar of
sales revenueCash flow to
sales ratioCash flows from operating activities
× 100
Sales revenueMeasures the cash flow generated from
operating activities for each dollar of
sales revenueAsset efficiency ratiosAsset turnover
ratioSales revenue
Average total assetsMeasures the sales revenue dollar
generated per dollar investment in
assetsDays inventory Average inventory
× 365
Cost of salesMeasures the average length of time it
takes to sell inventoryDays debtors Average trade debtors
× 365
Sales revenueMeasures the average length of time it
takes to collect the monies due from
trade debtorsTimes inventory
turnoverCost of sales
Average inventoryMeasures the number of times per
annum that inventory is turned overTimes debtors
turnoverSales revenue
Average trade debtorsMeasures the number of times per
annum that trade debtors is turned overLiquidity ratiosCurrent ratio Current assets
Current liabilitiesMeasures the dollars of current assets
per dollar of current liabilitiesQuick ratio Current assets − Inventory
Current liabilitiesMeasures the dollars of current assets
(excluding inventory) per dollar of
current liabilitiesCash flow ratio Net cash flows from operating activities
Current liabilitiesMeasures the ability of the entity
to meet its current obligations from
operating activities’ cash flows