For devotees of the shipping forecast, here is the World Meteorological Organisation’s classification of wind forces and effects.
These are ratios commonly used in corporate financial analysis.
Working capital ratio = current assets/current liabilities, where current assets = inventory + receivables + cash at bank and in hand + quoted investments, etc, and current liabilities = payables + short-term bank borrowing + taxes payable + dividends, etc. The ratio varies according to type of trade and conditions; a ratio from 1 to 3 is usual with a ratio above 2 taken to be safe.
Liquidity ratio = liquid (“quick”) assets/current liabilities, where liquid assets = receivables + cash at bank and in hand + quoted investments (that is, assets that can be realised within a month or so, which may not apply to all investments); current liabilities are those that may need to be repaid within the same short period, which may not necessarily include a bank overdraft where it is likely to be renewed. The liquidity ratio is sometimes referred to as the “acid test”; a ratio under 1 suggests a possibly difficult situation, and too high a ratio may mean that assets are not being usefully employed.
Turnover of working capital = sales/average working capital. The ratio varies according to type of trade; generally a low ratio can mean poor use of resources, and too high a ratio can mean overtrading. Average working capital or average inventory is found by taking the opening and closing working capital or inventory and dividing by 2.
Turnover of inventory = sales/average inventory, or (where cost of sales is known) cost of sales/average inventory. The cost of sales turnover figure is to be preferred, as both figures are then on the same valuation basis. This ratio can be expressed as number of times per year, or time taken for inventory to be turned over once = (52/number of times) weeks. A low inventory turnover can be a sign of inventory items that are difficult to move, and usually indicates adverse conditions.
Turnover of receivables = sales/average receivables. This indicates efficiency in collecting accounts. An average credit period of about one month is usual, but this varies according to credit stringency conditions in the economy.
Turnover of payables = purchases/average payables. Average payment period is best maintained in line with turnover of receivables.
Sales
Export ratio = exports as a percentage of sales.
Sales per employee = sales/average number of employees.
Assets
Ratios of assets can vary according to the measure of assets used:
Total assets = current assets + non-current assets + other assets, where non-current assets = property + plant and equipment + motor vehicles, etc, and other assets = long-term investment + goodwill, etc.
Net assets (“net worth”) = total assets minus total liabilities = share capital + reserves = equity.
Turnover of net assets = sales/average net assets. As for turnover of working capital, a low ratio can mean poor use of resources.
Assets per employee = assets/average number of employees. This indicates the amount of investment backing for employees.
Profit margin = (profit/sales) [.dotmath] 100 = profits as a percentage of sales; usually profits before tax.
Profitability = (profit/total assets) [.dotmath] 100 = profits as a percentage of total assets = return on total assets (ROTA).
Return on capital = (profit/net assets) [.dotmath] 100 = profits as a percentage of net assets (“net worth”, “equity” or “capital employed”) = return on net assets (RONA), return on equity (ROE) or return on capital employed (ROCE).
Profit per employee = profit/average number of employees.
Earnings per share (EPS) = after-tax profit minus minorities/average number of shares in issue.