Question 1
| Item | Dollars |
|---|---|
| Sales | 2 000 000 |
| Net profit | 210 000 |
| Total assets | 2 400 000 |
| Total liabilities | 1 000 000 |
| Total equity | 1 400 000 |
The table shows figures for Ironbark Engineering for last year. What is its return on equity ratio?
HSC Business Studies finance ratios
The Finance topic names seven ratios. Learn each one exactly as the course defines it, what it measures and what a change in it means.
| Liquidity | Current ratio = current assets ÷ current liabilities |
|---|---|
| Gearing | Debt to equity = total liabilities ÷ total equity |
| Profitability | Gross profit, net profit and return on equity ratios |
| Efficiency | Expense ratio and accounts receivable turnover |
The seven ratios
- Current ratio = current assets ÷ current liabilities.
- Debt to equity ratio = total liabilities ÷ total equity.
- Gross profit ratio = gross profit ÷ sales. Net profit ratio = net profit ÷ sales.
Comparing ratios
A ratio means little alone. Compare it over time, against a standard or with similar businesses, and remember the limits of the reports behind it: normalised earnings, capitalised expenses, how assets are valued, timing and the notes to the statements.
Try 2 questions
Question 2
Mulga Bakery starts March with 40 000 dollars in cash. In March it receives 125 000 dollars and pays out 150 000 dollars. What is its cash balance at the end of March?
Next step
Questions people ask
Should a ratio be a percentage?
Profitability and expense ratios are often shown as percentages; the current and debt to equity ratios are usually written as a number or as x : 1. Show the working either way.
Are there other ratios to learn?
Plan on these seven: they are the ones the Finance topic names.