Chapter 9
Interpretation of accounts
‘More money has been lost reaching for yield than at the point of a gun.’
Raymond Revoe Jr, Fortune, 18 April 1994, Wiley Book of Business Quotations (1998), p. 192.
Learning Outcomes
After completing this chapter you should be able to:
- Explain the nature of accounting ratios.
- Appreciate the importance of the main accounting ratios.
- Calculate the main accounting ratios and explain their significance.
- Understand the limitations of ratio analysis.
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Chapter Summary
- Ratio analysis is a method of evaluating the financial information presented in accounts.
- Ratio analysis is performed after the bookkeeping and preparation of final accounts.
- There are six main types of ratio: profitability, efficiency, liquidity, gearing, cash flow and investment.
- Three important profitability ratios are return on capital employed (ROCE), gross profit ratio and net profit ratio.
- Four important efficiency ratios are trade receivables collection period, trade payables collection period, inventory turnover ratio and asset turnover ratio.
- Two important liquidity ratios are the current ratio and the quick ratio.
- Five important investment ratios are dividend yield, dividend cover, ...
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