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
2
Q
Analysis of Financial Statements
A
- Liquidity
- Gearing
- Profitability
- Efficiency
3
Q
Liquidity
A
- Extent to which a business can meet its financial commitments in short term (less then 12 months)
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
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
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
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
8
Q
Profitability: GROSS PROFIT RATIO
A
- Shows how much each dollar of sales generates profit
9
Q
Profitability: NET PROFIT RATIO
A
- Shows operating costs or expenses of a business
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.
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
12
Q
Efficiency: EXPENSE RATIO
A
- Shows the amount of sales that are allocated to individual expenses, such as COGs sold and financial expenses
13
Q
Efficiency: ACCOUNTS RECEIVABLE TURNOVER RATIO
A
- Shows the effectiveness of a firm’s credit policy and how efficiently it collects its debts