Definitions for Ratios ?

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi All

I wonder if somebody can give me exact and easy to remeber definitions for ratios (gearing ratio, Gross Profit %, Net Profit %, debtor/creditor days/months and any others ) I know what they mean, but I always struggle to define them when I am asked to do so!

your help will be greatly appreciated!
eve

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Definitions for Ratios ?
      gearing ratio
    ,
      Gross Profit %
    ,
      Net Profit %
    ,
      debtor days/months
      creditor days/months
      gearing ratio, Debt as a proportion of the total capital employed by the company
        Gross Profit % The amount of money the company has left from sales revenue after paying the costs of sales i.e. what is left to pay expenses and provide the profit
          Net Profit %, the proportion of the sales revenue that is left as profit after all cost have been paid
            debtor days/months The average time taken by customers to pay for the sales
              creditor days/monthsThe average time it takes us to pay our suppliers
            • System
              System Posts: 100,534 🤖 Admin 🤖
              Re:Definitions for Ratios ?

              Be aware that the net profit ratio question came up in last December's DFS exam and there are two differing points of view regarding its definition.

              According to the Osborne book (page 204 DFS), net profit is profit after interest but before tax over revenue. However to many people, net profit is profit before interest and tax over revenue, referred to as profit from operations by AAT in a footnote on the same page.

              This confusion has been picked up on in the Chief Assessors Reports from previous exams so I was a lttle dismayed to see it reappear again in December without the AAT clarifying the ratio to use. I ended up writing a little explanatory note beside my answer, acknowledging my awareness of both ratios to the marker.

              Regards,

              Robert
            • System
              System Posts: 100,534 🤖 Admin 🤖
              Re:Definitions for Ratios ?

              Thank you for your help!
              Appreciated!
              :)
            • System
              System Posts: 100,534 🤖 Admin 🤖
              Re:Definitions for Ratios ?

              In my opinion the profit figure to use in any assessment of management performance should be the profit before taking off any interest or tax (what is generally referred to as PBIT). This shows the operational performance without allowing financing costs to cloud the picture.

              If on the other hand you want to look at the profit as a return earned by shareholders for investing in the business, the return on equity should look at the profit available for distribution in other words the profit after interest has been charged and tax taken off (PAT)

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