Intel Accounting and Business Techniques Used

5. Accounting and Business techniques used.

2.5.1 Financial Ratios

• Liquidity Ratios

It is very crucial that an organisation meets its day to day obligations as they fall due. It is possible that an organisation that has very good and positive looking financial statement may experience liquidity problems. Hence measuring liquidity allows the organisation to better monitor its cash flows. Two commonly used ratios to measure liquidity are shown below,

a) Current Ratio = Current Assets / Current Liabilities.

b) Quick or Acid Test Ratio = Current Assets - Inventory Current Liabilities

• Profitability Ratio.

“A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.” Source: (http://www.investopedia.com/terms/p/profitabilityratios.asp). Commonly used profitability ratios are shown below,

a) Gross Profit Margin = (Gross Profit / Sales) X 100%

b) Net Profit Margin = (Profit before Interest and Tax / Sales) X 100%

• Capital Structure Ratios

These ratios show the proportions of debt and equity used to finance an organisations operation’s as well as the effects of interest on working capital. Ratios commonly used are shown below,

a) Gearing Ratio = Long Term Debt / Equity

Or

Gearing Ratio = Long Term Debt / Long Term Debt + Equity

b) Interest Cover = Profit before Interest and Tax / Interest Payable

• Investment Valuation