# Financial Ratio Calculations | Profitability Calculations

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Financial ratios are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyse trends and to compare the firm’s financials to those of other firms. Sometimes, ratio analysis can predict future bankruptcy of a business. As we can see the performance of Systems Integrated PLC is related to the areas of profitability, efficiency and liquidity. First of all, the profitability of a company is clearly shown through the Return on Capital Employed ratio (R.O.C.E) and the gross profit percentage, the second one is reduced from 2009 to 2010 but about the first we can say that is getting higher. Moreover, we have the gross profit margin ratio and we can see that year by year is getting lower and this is not good for our business .Profitability depends on the obsolescence/damage/theft, or even the under/overvaluation of stock. Also, it depends on the general fall or increase in selling price. Utility companies tend to have low R.O.C.E ratios because of the high investments in fixed assets. For example, a high R.O.C.E may be due to the fact that some firms are using old-aged assets which are almost fully depreciated.

## Liquidity

4) Acid Test = (Current Assets – Inventors) / Current Liabilities = (1822 – 935) / 1313 = 0.67:1 5) Inventory Holding Period = (Average Inventory / Cost of Sales) * 365 = [(850 + 935) / 2] / 7540 = 43 days 6) Customer Collection Period = (Debtors / Sales) * 365 = (842 / 11178) * 365 = 27 days 7) Current Ratio = Current Assets / Current Liabilities = 1822 / 1313 = 1.4:1 8) Suppliers Payment Period = (Suppliers / Purchases) * 365 = (1313 / 7625) * 365 = 63 days 9) Interest Cover = EBIT / Interest Expense = 1366 / 105 = 13 times Secondly, liquidity is mostly shown by the current ratio and the acid test ratio. A current ratio of 2.5:1 is considered to be adequate. In addition to this, a high current ratio indicates that the firm is tying up its resources in unproductive assets. Also, indicates slow moving stock and slow paying customers. The sufficiency of a current ratio depends on the composition of the current assets and how soon the short/long term obligations have to be settled. Also an acid test ratio of 1.1:1 is considered to be sufficient, too. The numerator of a liquidity ratio is part or all of current assets. Possibly the most common liquidity ratio is the current ratio . The problem with the current ratio as a liquidity ratio is that inventories, a current asset, may not be converted to cash for several months, while many current liabilities must be paid within 90 days.

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