The document defines and provides formulas for several common financial ratios used to analyze business performance, including: Current ratio - measures a business's ability to pay short-term debts with its current assets; Acid test ratio - like the current ratio but excludes stock to measure ability to pay debts without stock sales; Gross profit percentage - shows gross profit as a percentage of sales to evaluate costs of goods sold; Net profit percentage - calculates net profit as a percentage of sales to assess operating costs.

1. Basic Ratios

2. Current Ratio Helps a business work out their Solvency. Allows a business to see how well they are able to meet their liabilities. Shows how many assets the business has compared to liabilities (1.5-2 is considered good practice) Current assets Current ratio = Current liabilities

3. Acid Test Ratio Like the current ratio, but removes stock, to work out how a business would meet its liabilities without the sale of stock. Again a positive figure should be higher than 1 but not higher than 2. Current assets - stock Acid test ratio = Current liabilities

4. Gross Profit Percentage Shows gross profit as a percentage of turnover. Sometimes called gross profit margin, and shows how well the business is managing purchase of stock. A high gross profit percentage shows that the business is doing well and controlling costs Gross Profit Gross Profit % = Turnover

5. Net Profit Percentage Takes the profit calculation one step further by removing all other costs. This shows profit before tax, if Gross profit is high yet Net low then it shows that the business operating costs are too high. Net Profit Net Profit % = Turnover

6. Return on Capital Employed (ROCE) Final calculation that a business might use for profitability. Worked out by considering the net profit as a percentage of the capital employed by that business. This means they can compare the percentage received against what they would have received if they put the money in a bank. Net profit before interest and tax ROCE % = Capital employed (incl. Shareholders)

7. Stock Turnover Shows how many times over the business has sold the value of its stocks during the year. The higher the stock turnover the better, because money is then tied up for less time in stocks. Cost of Goods Sold Stock Turnover Ratio = Stock

8. Asset Turnover Shows the percentage of total assets that the business owns By dividing the sales by the total assets, the business is able to work out how many pounds it earns for every pound invested in assets. Sales Asset Turnover = Total Assets

9. Debtor’s Collection Shows the link between the number of debtors and how long on average it takes the business to collect its debts. The fewer the number of days means the business has better credit control, because it collects what it is owed more quickly. X 365 Debtors…. Total number of days it takes debtors to pay = Credit sales