Performance

gross profit margin

gross profit/sales

operating profit margin

PBIT/sales

net profit margin

net profit/sales

(net) asset turnover

sales/capital employed (NCL+EQUITY)

return on capital employed (ROCE)

PBIT / capital employed

Liquidity

current ratio

current asset/current liability

quick ratio(acid test)

(C.A. - inventory)/current liability

receivable collection period

(T.R. / credit sales)*365

inventory turnover day

(inventory / COS)*365

payable payment day

(T.P. /purchase)*365

Long-term solvency

Debt ratio

total debt / total asset

gearing

NCL/ NCL+EQUITY

interest cover

PBIT / finance cost

Investor's ratio

EPS

earning / weighted average number of shares

Price to earning ratio

(P/E ratio)

share price / EPS

dividend yield

DPS / share price

dividend cover

EPS / DPS

EBITDA(earning before interest, tax, depreciation and amortisation)

Description

Advantages

Disadvantages

EBITDA is considered an

indicator of the earnings potential of a business. It can be used to analyse and compare profitability between companies because it eliminates the effects of financing and accounting decisions.

EBITDA is often used internally by management as it represents the earnings of a business that management has most control over. Reporting this measure gives stakeholders an indication of management performance. EBITDA is a good metric to evaluate profitability (but not cash flow).

?Subject to manipulation by director (can change what is included from on reporting period to the next)

?Misconception that EBITDA represents cash earning

? Should be used in conjunction with other measures.

EVA (Economic Value Added)

Description

Advantages

Disadvantages

EVA is a measure of a company's financial performance based on its residual wealth by deducting its costs of capital from its operating profit, adjusted for taxes on a cash basis. It shows the amount by which earnings exceed the minimum rate of return that investors could get by investing elsewhere.

? Maximisation of EVA will create real wealth for the shareholders.

?EVA may be less distorted by the accounting policies (is based on figures that are closer to cash flows)

?recognises costs such as advertising and development as investments for the future

?focuses on efficient use of capital.

?encourage managers to focus on short-term performance.

?EVA is based on historical accounts (limited use as a guide to the future)

?A large number of adjustments are required to calculate net operating profit after taxes (NOPAT) and the economic value of net assets.

Benchmarking

Description

Advantages

Disadvantages

Setting best practice or industry standards as a

target. The business then attempts to improve its own performance by being as good as, or better than, targets in the most important areas of operation.

Benchmarking uses realistic performance targets for

the operations of a business and allows stakeholders to understand what an entity has focused on in a period. It is useful in not-for-profit organisations in which earning profit is not the primary focus. It helps to highlight the importance of non- financial performance measures

There is no consistency in what is reported - an entity could report only those benchmarks that it has success in and elect not to report others. They focus on past performance and do not look forward to the future aims of the entity.