Using Financial Ratios A2 Business Studies Aims and Objectives Aim: To understand how to use financial ratios. Objectives: Explain the uses of financial ratios. Calculate financial ratios. Analyse financial ratios. Evaluate financial ratios. Starter Activity • Brainstorm in groups the reasons why businesses and stakeholders may use financial ratios. Using Financial Ratios • Ratio analysis can be extremely useful as a management tool. • Can be used to measure performance. • Decision making tool. • Investors can judge performance. • Shareholders can judge how well managers are performing. Using Financial Ratios Use ratios to analyse Apple’s performance. • Operating Profit Margin • Current Ratio • Acid Test Ratio • ROCE • Asset Turnover • Stock Turnover • Creditor Days • Debtors Days A Worked Example Operating Profit Margin. Shows the relationship between profit and sales. (Operating profit / Sales) X100 (545/1390) X 100 = 39.2% This shows for every £1 of sales 39.2p is operating (Net) profit. This is reasonably high, showing that Apple has a tight control over their expenses whilst benefitting from high profit margins. Apple however is in very competitive markets, and this high profit margin may not be sustainable. Ultimately it will depend on technological advances and whether Apple can remain as a first mover in the market, whilst keeping a tight control over their costs. Using Financial Ratios Use ratios to analyse Apple’s performance. • Operating Profit Margin = 39.2% • Current Ratio = 1:1.15 • Acid Test Ratio = 0.96:1 • ROCE = 41.9% 42p profit generated for every £1 on Capital • Asset Turnover = 42.7 for every £1 spent on assets 42.7p was generated in profit. • Stock Turnover = 13.52 times a year • Creditor Days = 57.5 days • Debtors Days = 35.4 days Apple’s Finances Discussion of Apples’ Financial Situation. • Is it sustainable? • What factors may affect Apples’ financial ratios? • What effects may these financial ratios have on potential investors? • Would you invest in Apple at 374.60 per share having calculated their ratios?