3.5 - Assessing Competitiveness

Question 1

Return On Capital Employed

Answer 1

Financial ratio that measures a company’s profitability and efficiency in using its capital to generate profit. It shows how well a business is utilising its resources to produce returns

Question 2

Formula for Return On Capital Employed

Answer 2

(Operating Profit / Total equity + Non current liabilities) * 100

Question 3

Advantages of Return On Capital Employed

Answer 3

1. Measures efficiency
2. Useful for comparisons
3. Indicates how sustainable a business’s profitability is

Question 4

Disadvantages of Return On Capital Employed

Answer 4

1. Ignores external factors
2. May not suit all industries as capital-intensive industries (e.g., manufacturing) may naturally have lower ROCE
3. Companies can alter figures by delaying investments or selling assets

Question 5

Gearing ratio

Answer 5

Financial metric that measures the proportion of a company’s capital that is financed by debt compared to equity. It indicates the level of financial risk a business carries, higher gearing means more reliance on borrowed funds

Question 6

Formula for gearing ratio

Answer 6

(Non current liabilities / Total equity + Non current liabilities) * 100

Question 7

Advantages of gearing ratio

Answer 7

1. Shows financial stability
2. Businesses can decide whether to take on more debt helping decision making
3. Useful for lenders

Question 8

Disadvantages of gearing ratio

Answer 8

1. Ignores profitability
2. Does not consider industry norms, with some industries naturally having higher gearing
3. Can be misleading as seasonal debt fluctuations may distort results

Question 9

Benefits of high gearing

Answer 9

1. Less capital required to be invested by the shareholders
2. Debt can be a relatively cheap source of finance compared with dividends
3. Easy to pay interest if profits and cash flows are strong

Question 10

Benefits of low gearing

Answer 10

1. Less risk of defaulting on debts
2. Shareholders call the shots rather than debt providers
3. Business has the capacity to add debt if required

Question 11

Ratio analysis

Answer 11

The comparison of financial data to gain insights into business performance

Question 12

Main groups of ratios

Answer 12

1. Profitability
2. Liquidity
3. Financial efficiency

Question 13

Benefits of ratio analysis

Answer 13

1. Helps in performance evaluation
2. Assists in decision-making
3. Useful for budgeting and forecasting

Question 14

Drawbacks of ratio analysis

Answer 14

1. Does not consider qualitative factors
2. Can be manipulated
3. Ignores external factors

Question 15

Liquidity ratio

Answer 15

Assesses whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due

Question 16

Formula for current ratio

Answer 16

Current assets / Current liabilities

Question 17

Evaluating current ratio values

Answer 17

1. A ratio of 1.5-2.5 would suggest acceptable liquidity and efficient management of working capital
2. A low ratio well below 1 indicates possible liquidity problems

Question 18

Formula for acid test ratio

Answer 18

Current assets - Stock / Current liabilities

Question 19

Evaluating acid test ratio values

Answer 19

Significantly less than 1 is often bad news

Question 20

Income statement

Answer 20

Measures the business’ performance (income and costs) over a given period of time

Question 21

Balance sheet

Answer 21

A snapshot of the business’ assets and liabilities on a particular day

Question 22

Cash flow statement

Answer 22

Shows how the business has generated and disposed of cash and liquid funds during a specific period

Question 23

Human Resources

Answer 23

The department responsible for managing employees within an organisation. It plays a key role in hiring, training, motivating, and retaining staff to ensure business success

Question 24

Key measures of Human Resources performance

Answer 24

1. Labour turnover and staff retention
2. Labour productivity
3. Absenteeism

Question 25

Employee retention

Answer 25

A business's ability to keep its employees over time rather than losing them to competitors

Question 26

Labour turnover

Answer 26

Percentage of the workforce that leave a business within a given period

Question 27

Formula for labour turnover

Answer 27

(Number of employees leaving during period / Average number employed during period) * 100

Question 28

Benefits of high staff turnover

Answer 28

1. Fresh ideas and innovation 2. Removal of poor performers 3. Opportunities for promotion

Question 29

Drawbacks of high staff turnover

Answer 29

1. Increased recruitment and training costs 2. Increased pressure on remaining staff 3. Disruption to production

Question 30

Factors affecting staff turnover

Answer 30

1. Type of business 2. Pay and other rewards 3. Working conditions 4. Opportunities for promotion 5. Economic conditions

Question 31

Ways to improve staff turnover

Answer 31

1. Effective recruitment and training 2. Provide competitive pay and other incentives 3. Job enrichment 4. Reward staff loyalty

Question 32

Labour productivity

Answer 32

Measures output per worker (or per hour worked) over a given period. It shows how efficiently labour is used in producing goods and services

Question 33

Formula for labour productivity

Answer 33

(Output per period / Number of employees at work) * 100

Question 34

Factors affecting labour productivity

Answer 34

1. Skills, ability and motivation of the workforce 2. External factors, such as reliability of suppliers 3. Extent and quality of fixed assets, like IT systems

Question 35

Ways to improve labour productivity

Answer 35

1. Measure performance and set targets 2. Invest in capital equipment 3. Invest in employee training 4. Improve working conditions

Question 36

Staff absenteeism

Answer 36

An employee's intentional or habitual absence from work

Question 37

Formula for staff absenteeism

Answer 37

1. (Number of staff absent during period / Number employed during period) * 100 2. (Number of days taken off for unauthorised absence during period / Total days worked by workforce over period) * 100

Question 38

Ways to reduce staff absenteeism

Answer 38

1. Set targets and monitor trends 2. Have a clear sickness and absence policy 3. Provide rewards for good attendance

Question 39

Employee empowerment

Answer 39

Giving employees the power to do their job