Financial Ratios (1 Viewer)

[luke_j1984]

return on owners' equity = net profit * 100 / owners' equity

PROBLEM! Before or after tax. This is a really complicated question! Logically you would think it would be net profit (after tax) as gross (usually means before tax), but in the text book i have: BUSINESS STUDIES HSC - D. Sykes, V. Hansen, E. Codsi, return on owners' equity ratio is on page 130, then there is a exercise related to the viewing of a revenue statment & a balance sheet (page 131). Answers in the back of the book (page 523) use the net profit (before tax). My teacher said it is after tax! Remembering these formulas is hard enough, figuring out which one to belief is even worse. I also have a problem with the solvency (debt to equity) gearing ratio. In text book the formula is long term debt * 100 / shareholders' equity. Teacher said it should be total liabilities / owners' equity. Can anyone who has done the HSC or has a good amount of knowledge on financial ratios please HELP ME OUT! Thanks

 

[marko]

g'day
well youre second question im not entirely sure, ive gotten rid of my textbooks form last year, but the first one:

'net profit' in HSC business studies has nothing at all to do with tax; think simpler.

net profit = gross profit - expenses

where expenses are things like transport, rent, electricity, adveritising etc (N.B. this does NOT include raw materials)

gross profit is basically defined as the money made from sales minus the cost of the inputs.

if you want any of this clarified just ask!

(and if anyone thinks its wrong let me know)

 

[nova]

Like marko said, forget the tax...

Debt to equity ratio should be : total debt / OE

edit: definition from ANZ
http://www.anz.com/edna/dictionary.asp?
action=content&content=debt-to-equity_ratio

A measure of a company's gearing (borrowing) which is calculated by dividing all financial debt by shareholders' funds (equity).

 

[danman]

Formula for debt to equity ratio in sykes text is incorrect. It is total liabilities/total equity (for HSC business studies anyway). Ignore tax - it will never ever come up.

 

[M@C D@DDY]

yeh dun need to worry abt tax i asked teacher he sed it was irrelavent jus use the one they give u

 

[Grey Council]

hey! MACDADDY, I asked the teacher, not you.

and I posted it up here too. Just go to the next page, all the replies are prolly still there.

But in a nutshell, they won't give you figures before tax AND figures after tax. It'll just be figures, and you calculate the net profit. Don't worry about the tax.

 

[Seraph]

uhh i have a question might as well ask here since its part of fiancnail ratios

righto say i have a balance sheet and i calculate my current assets as totalling to 4500
and my Currenet Liabilities totalling to 1000

okay now the acceptable ratio standard for the current ratio is 2:3

So right 4500/1000
= 4.5 : 1

now basically do i have to chagne it as a ratio to 3?? how else can i compare it with the industry standard
well anyway it would be 13.5 : 3
right?

 

[luke_j1984]

Seraph
The current ratio is 4.5:1 & if the industry standard is 2:3 the company is not reinvesting enough of its profit back into capital. It is quite strange to have an industry standard that has more liabilities than assets as I would consider this business would fail fairly quickly. As for changing it to 13.5:3 i don't think that is necessary as whole numbers are required, not halves.

 

[Seraph]

well im assuming its always x : 1

i wouldve thought if the standard is 2:3
you would have to change it to that ratio format

 

[M@C D@DDY]

no it's not just use simple mathematics to work it out