3.5 Flashcards
Definition of Liquidity
The ability of a business to meet its short term commitments with its available assets
Definition of Non Current Assets
Items that are owned for the long-term such as machinery and buildings
Definition of Current Assets
Items that are converted to cash quickly usually in 12 months. This can include cash, trade receivables and inventory
Definition of Current Liabilities
Money that a business owes and is due to be settled soon. Includes trade payables, short term borrowing like an overdraft
Definition of Non Current Liabilities
Money that a business owes that does not need to be settled for at least 12 months. This can include bank loans and mortgages
Formula of Net Assets (Capital Employed)
Assets - Liabilities
What is Gearing Ratio used for
Shows the balance of non-current liabilities to shareholder capital
Formula for Gearing Ratio
(Non Current Liabilities / Capital Employed) *100
What is High Geared
-Over 50%
-High interest will need to be paid for high level of borrowing
What is Low Geared
-Under 50%
-Business may be missing out on opportunity to access finance
What is ROCE
Measures how well a business generates a profit from funds invested
The higher the rate the more profitable it is
Formula of ROCE
(Operating Profit / Capital Employed) *100
3 Limitations of Ratio Analysis
-Only snapshot
-Only quantitative information
-Accounts may have been manipulated
Formula of Labour Productivity
Total Output / Average no. employees
Formula of Labour Turnover
(No. of Staff Leaving / Average no. Staff) * 100
