Financial measures

In this lesson

1. 0:00 Financial performance measures overview
2. 1:05 Ratio analysis and comparison methods
3. 2:20 Profitability ratios explained
4. 4:07 Return on capital employed and equity
5. 5:51 Profit margins and asset turnover
6. 7:49 Breaking down return on capital employed
7. 8:39 Liquidity ratios and cash flow importance
8. 11:32 Current ratio and quick ratio calculations
9. 13:34 Activity ratios and working capital management
10. 14:55 Inventory days and turnover
11. 17:29 Receivables and payables days
12. 19:42 Worked example: current and quick ratio
13. 24:38 Gearing and leverage explained
14. 27:08 Calculating gearing ratios
15. 28:14 Interest cover and debt obligations
16. 30:16 Investment centre performance measurement
17. 30:47 Return on investment for divisions
18. 32:50 ROI worked example: Fluff vs Orange
19. 35:38 Residual income calculation and interpretation
20. 38:36 Residual income decision rule with projects

About this lesson

You'll start by exploring profitability ratios—return on capital employed, return on equity, and profit margins—which reveal how effectively a business generates returns on invested capital and manages its core operations. You'll discover how to break down return on capital employed into its component parts (profit margin and asset turnover) to understand what's driving performance changes over time. The lesson then moves to liquidity ratios, including the current ratio and quick ratio, which assess whether a business has sufficient cash to meet its obligations. You'll learn why cash flow matters more than profit alone, and when to strip inventory from calculations for businesses where stock moves slowly. The activity ratios section covers working capital management through inventory days, receivables days, and payables days—essential metrics for understanding how efficiently a business collects cash from customers and pays suppliers. You'll explore the balance between maintaining healthy operations and tying up excessive cash in working capital. Finally, you'll examine gearing ratios and interest cover, which measure financial risk by assessing how much debt a business carries and whether it can comfortably meet interest payments. For divisional performance, you'll learn return on investment and residual income—two methods for appraising how individual departments or investment centres perform relative to their capital employed and the company's cost of capital. Throughout, you'll work through practical examples showing how to interpret these ratios in context and make meaningful comparisons across time periods and business units.

Duration: 41m