*Profitability*

**Return on capital employed**

= (operating profit / share capital + reserves + non-current liabilities) x 100

**Operating profit margin
**= (operating profit / sales revenue) x 100

** Operating profit**

= sales revenue – operational costs

**Gross profit margin
**= (gross profit / sales revenue) x 100

** Gross profit**

= sales revenue – cost of sales

**Return on ordinary shareholders’ funds
**= (net profit after tax and preferential dividend / ordinary share capital and reserves) x 100

*Efficiency*

**Average inventory turnover period***

= (average inventories held / cost of sales) x 365

**Average settlement period for trade receivables***

= (average trade receivables / credit sales revenue) x 365

**Average settlement period for trade payables*
**= (average trade payables / credit purchases) x 365

**Sales revenue to capital employed**

= sales revenue / (share capital + reserves + non-current liabilities)

**Sales revenue per employee**

= sales revenue / number of employees

*Liquidity*

**Current ratio**

= current assets / current liabilities

**Acid test**

= current assets (excluding inventories) / current liabilities

**Gearing ratio**

= (long term liabilities / (share capital + reserves + long term liabilities)) x 100

**Interest cover ratio**

= operating profit / interest payable

.*Investment*

**Dividend pay-out ratio**

= (dividends announced for year / earnings per year available for dividends) x 100

**Dividend cover ratio**

= (earnings per year available for dividends / dividends announced for year) x 100

**Dividend yield**

= ((dividend per year / (1 + ‘dividend tax credit’ rate of income tax) / market value per share) x 100

**Earnings per year**

= earnings available to ordinary shareholders / number of ordinary shares issued

**Price/earnings ratio**

= market value for share / earnings for share

*Cost-volume-profit analysis*

**Break-even point
**Total sales = total costs

**Number of units sold at break-end point
**= fixed cost / contribution per unit

**Number of units sold to achieve target profit
**= (fixed cost + target profit) / contribution per unit

**Contribution margin ratio**

= (contribution/sales revenue) x 100

** Contribution
** = sales revenue per unit – variable cost per unit

**Margin of safety
**= actual sakes – break-even sales

*Investment decisions*

**Payback period**

= length of time it takes for the initial investment to be repaid from resulting cash inflows

**Accounting rate of return
**= (average annual profit / average investment) x 100

**Average annual profit
**= (total project revenue – depreciation) / lifetime of project in years

**Depreciation**

= initial cost – disposal value

**Average investment**

= (initial investment + disposal value) / 2

**Present value**

= future cash flow x (1 / discount factor)

**Internal rate of return**

= the discount rate at which future cash flows have a net present value of zero

*Managing working capital*

**Working capital**

= current assets – current liabilities

** Current assets
** = inventories + trade receivables + cash

** Current liabilities
** = trade payables + bank overdrafts

**Operating cash cycle**

= average inventories turnover period* + average settlement period for trade receivables* – average settlement period for trade payables*

**Average inventory turnover period*
**= (average inventories held / cost of sales) x 365

**Average settlement period for trade receivables***

= (average trade receivables / credit sales revenue) x 365

**Average settlement period for trade payables***

= (average trade payables / credit purchases) x 365

**Lead time for orders (in weeks)**

= annual demand for component / number of weeks in a year

* To nearest day