11.6 financial ratios Flashcards

1
Q

Types of Analysis

A
  • Horizontal, comparing figures within one financial year
  • Vertical, comparing figures within different financial years
  • Trend Analysis, comparing figures for periods of 3-5 years
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2
Q

Analysis of Financial Statements

A
  • Liquidity
  • Gearing
  • Profitability
  • Efficiency
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3
Q

Liquidity

A
  • Extent to which a business can meet its financial commitments in short term (less then 12 months)
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4
Q

Liquidity: CURRENT RATIO

A
  • Measures ability to pay back current liabilities with their current assets
  • Higher the current ratio, the more capable the business is of meeting their short-term obligations
  • 2:1 indicates a sound financial position
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5
Q

Gearing (Solvency)

A
  • Gearing is the proportion of debt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business
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6
Q

Gearing: DEBT TO EQUITY RATIO

A
  • Extent to which the firm is relying on debt to finance the business
  • Ratio of greater than 1 means that the business has less equity than debt
  • Ratio of between 0 and 1 means that the business has more equity than debt
  • Can be improved by reducing debt or increasing equity
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7
Q

Profitability

A
  • Earning performance of the business and indicates its capacity to use its resources to maximise profits
  • Gross Profit Ratio
  • Net Profit Ratio
  • Return on Equity Ratio
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8
Q

Profitability: GROSS PROFIT RATIO

A
  • Shows how much each dollar of sales generates profit
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9
Q

Profitability: NET PROFIT RATIO

A
  • Shows operating costs or expenses of a business
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10
Q

Profitability: RETURN ON EQUITY RATIO

A
  • Shows how effective the funds contributed by the owners have been in generating profit
  • The higher the ratio, the better the return for the owner.
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11
Q

Efficiency

A
  • Ability of a business to minimise its cost and manage its assets so that maximum profit is achieved with the lowest possible level of assets
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12
Q

Efficiency: EXPENSE RATIO

A
  • Shows the amount of sales that are allocated to individual expenses, such as COGs sold and financial expenses
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13
Q

Efficiency: ACCOUNTS RECEIVABLE TURNOVER RATIO

A
  • Shows the effectiveness of a firm’s credit policy and how efficiently it collects its debts
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