3.5 Flashcards
what is ratio analysis
involves extracting information from financial accounts to assess business performance
supports evidence-based decision making, as it provides measurable data that can be used to support judgements and compare performance against objectives
what is the gearing ratio
shows the long-term financial structure of the business
gearing ratio formula
(non current liabilities/current liabilities - total assets) x 100
what does it mean if a business is highly geared
highly-geared business more than 50 per cent of its capital employed are long-term loans
The outcome of the gearing ratio calculation will be greater than 50 per cent
Substantial levels of interest will need to be paid on this high level of borrowing which means
The level of profit available to pay as dividends to shareholders is reduced
Profit available to retain within the business is limited
The business is likely to be considered a risk for further investment
It is also likely to face difficulties in raising further loan capital
what does it mean if a business is lowly geared
A low-geared business has less than 50 per cent of its capital employed as long-term loans
The outcome of the gearing ratio calculation will be less than 50 per cent
The business may be missing out on the opportunity to access finance without the need to dilute existing shareholders’ control
what is ROCE and what is the formula
a measure how how effectively a business uses the capital invested in the business to generate profit
(operating profits/current liabilities - total assets) x 100
pros of ratio analysis
Comparison: Ratios allow for easy comparison of a company’s performance over time or with its competitors or industry benchmarks, helping stakeholders identify trends and areas for improvement.
Decision Making: Ratios provide valuable information to stakeholders, helping decision-making processes
cons of ratio analysis
Limitations of Ratios: Ratios have limitations and may not provide a complete picture of a company’s financial health.** They are based solely on financial data and may not capture qualitative factors that can impact performance.**
Data Quality: The accuracy and reliability of ratio analysis depend on the quality of financial data used.** If the data is incomplete, inaccurate, or manipulated, the ratios may not reflect the true financial position of the company**.
what is labour productivity
a measure of output per employee
labour productivity formula
total output/ average number of employees
what is the labour turnover rate formula
(number of staff leaving /number of staff) x 100
problems with high labour turnover
Increased recruitment and selection costs
Increased induction and training costs
Lower productivity levels as workers settle into new roles
opportunities of high labour turnover
Workers with existing skills can be recruited to reduce the need for training
New ideas and creativity introduced to the business
New perspective and approaches to problem-solving can improve business performance
absenteeism formula
(staff absent / staff employed) x 100
