#### Guide to Ratios

We have identified six key ratios to cover the major areas of company performance. Slightly different models are sometimes used within the credit industry to compute ratios. However, the methods which are outlined below and used in our reports are commonly recognised and have standard usage.

**Current Ratio (Ratio)**

This is a measure of the liquidity* *of a company or its ability to meet day to day commitments. The Current Ratio represents the degree to which the company's short-term assets cover its current liabilities. (Note incidentally that current assets minus current liabilities gives the figure for working capital).

Calculated as: Current Assets/Current Liabilities

**Credit Period (Days)**

This is a measure of the liquidity of a company. It estimates how quickly (in days) the company gets paid by comparing the company's turnover for the year to the amount of trade debtors (bills receivable and amounts recoverable on contracts outstanding at any one time).

Calculated as: (Trade Debtors/Turnover) x 365

**Return on Capital (%)**

This is a measure of profitability or company performance. Return on Capital is taken as an indication of how much profit a business yields relative to the money invested. (Note that capital employed is the sum of net assets (also known as shareholders' funds) and total long-term liabilities). The ratio is expressed as a percentage figure.

Calculated as: Pre-Tax Profit/Capital Employed x 100

**Pre-Tax Margin (%)**

This is a measure of the profitability of a company. It represents the percentage of sales left as profits or losses before tax. The ratio is expressed as a percentage figure.

Calculated as: Pre-Tax Profit/Turnover x 100

**Equity Gearing (%)**

This is a measure of solvency. It describes the relationship of the company's assets to net assets. (Note that total assets is the sum of capital employed and current liabilities; and that capital employed is the sum of net assets, total long-term liabilities and provisions). The ratio is expressed as a percentage figure.

Calculated as: Net Assets/Total Assets x 100

**Debt Gearing (%)**

This is a measure of solvency. It describes the 'gearing' or 'leverage' of a business by comparing long-term liabilities to net worth. (Note that net worth is net assets minus intangible assets). The ratio is expressed as a percentage figure.

Calculated as: Long-Term Loans/Net Worth x 100