Lecture notes MNB1601 - Business Management IB (MNB1601) Introduction to Business Management, ISBN: 9780190745769

Accounting Equation:

Assets = Liabilities + Owners Equity

Profitability Ratios

1.1 Gross Profit Margin

Sales – Cost of Goods Sold 100
Gross Profit Margin = x
Sales 1

1.2 Net Profit Margin

Net profit after tax 100
Net Profit Margin = x
Sales 1

1.3 Return on Investment (ROI)

Net profit after tax 100
ROI = x
Total Assets 1

1.4 Return on Equity (ROE) or Return on Net Assets (RONA)

Net profit after tax 100
ROE = x
Shareholders Equity 1

Net profit 100
RONA = x
Total Assets - Liabilities 1

Liquidity Ratios

1.5 Networking Capital = Current Assets – Current Liabilities
1.6 Current Ratio
Current Assets
Current Ratio =
Current Liabilities

1.7 Quick (Acid-Test) Ratio

Current Assets - Inventory
Quick Ratio =
Current Liabilities

, Activity Ratios

1.8 Inventory Turnover
Cost of Goods Sold
Inventory Turnover =
Average Inventory
1.9 Average Collection Period (ACP)

Accounts Receivable
ACP =
(Annual Sales / 360)
*This equation assumes a 360 day year

1.10 Average Payment Period (APP)

Accounts Payable
ACP =
(Annual Credit Purchases / 360)
*This equation assumes a 360 day year

Debt (or Solvency) Ratios

1.11 Debt Ratio

Total Liabilities 100
Debt Ratio = x
Total Assets 1
1.12 Debt Equity Ratio

Long Term Debt 100
Debt Ratio = x
Shareholders’ Equity 1

Securities market Ratios

1.13 Earnings per Share (EPS) = Earnings after Tax – Preference Dividend / Number of
Ordinary Shares Issued

1.14 Dividend per Share (DPS)

Dividends for Ordinary Shares
DPS =
Number of Ordinary Shares Issued

1.15 Price-Earnings Ratio (P/E Ratio)
Current Market Price per Ordinary Share
P/E Ratio =
Earnings per Share (EPS)