3.5 assessing competitiveness Flashcards
what is the statement of comprehensive income?
shows the income and expenditure of a business over a period of time
how do you work out gross profit ?
revenue - cost of sales
how do you work out operating profit ?
gross profit - expenses
which stakeholders are interested in the account and why ?
- shareholders - interested in dividend
- employees - wage and stability
- managers - key performance data
4.suppliers - need to determine level of trade credit to give - gov - how much tax is payable
- community - jobs
what is liquidity ?
ability of a business to meet its short term commitments (e.g. payments to creditors) with its available assets
what is the total funding known as?
capital employed
what are the differences between non current (assets + liabilities) and current
non current are things that are owned long term and current are things owned soon
why are shareholders interested in the balance sheet?
- Used to identify the asset structure of the business and how their investment has been put to use
- Used to determine the rough value of a business which helps a judgement on whether their investment is growing
why are managers interested in the balance sheet?
- Used to identify the financial position of the business at a given point in time
- Useful to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills
why are suppliers and creditors interested in the balance sheet?
- See the risk with trade credit
why are employees interested in the balance sheet ?
- job security
- stability
why is ratio analysis important?
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 by showing the balance of non-current liabilities (e.g. long-term loans) to shareholder capital used to fund a business
how do you calculate gearing ratio?
non current liabilities/capital employed x 100
how do you work out capital employed?
current liabilities - total assets
what is return on capital employed ?
It compares the profit made by a business to the amount of capital invested in the business
It is a measure how how effectively a business uses the capital invested in the business to generate profit
how do you work out roce?
operating profit / capital employed x 100
what is a highly geared business?
more than 50 per cent of its capital employed are long-term loans
what is the impact of having a highly geared business?
- 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
how can you reduce gearing?
Issuing more ordinary shares to create further share capital
Retaining more profits to avoid
further borrowing
Repaying loans to lower interest costs for the business
what is a low geared business?
less than 50 per cent of its capital employed as long-term loans
what is the impact of a low geared business?
- The business may be missing out on the opportunity to access finance without the need to dilute existing shareholders’ control
- Lenders such as banks are more likely to approve loan applications from low-geared businesses
how to increase low gearing?
- Buying back ordinary shares to reduce share capital in relation to borrowing
- Issue more preference shares with limited loss of control
- Obtain more loans
why should the roce be higher ?
indicates that the business is profitable and using its capital efficiently
