3.5.2- Ratio Analysis

Question 1

Gearing Ratio

Answer 1

non current liabilities/capital employed x 100%

• looks at the source of long term finance of the business and where it comes from
• > 50% means the business is highly geared, meaning much of the firms money comes from loans which is risky
• <50% means the business is low geared and most of the money comes from the owners, which is better for investment

Question 2

Capital Employed

Answer 2

non current liabilities + total equity = capital employed

Question 3

Current Ratio

Answer 3

current assets / current liabilities

Question 4

Acid Ratio

Answer 4

current assets - inventories/ current liabilities

Question 5

Return on Capital Employed (ROCE)

Answer 5

operating profit/ capital employed x 100%

• measure of profitability for the business
• demonstrates how hard the business makes the money invested work

Question 6

Limitations of ratio analysis

Answer 6

• ratios must be seen in an industry context (supermarkets have a low current ratio as they sell stock v quickly therefore it isn’t deep)
• balance sheet is just a snapshot of the business on a day, dynamic figures could change