3.5.2 Ratio analysis Flashcards
How do you calculate capital employed?
Non current liabilities + equity
How do you calculate ROCE and what does it tell us?
ROCE % = Operating profit/ capital employed X 100
ROCE tells the business how much money a firm made compared to the amount put into the business.
What are the 2 ways ROCE can be improved?
By reducing non current liabilities by paying off debts or by increasing operating profit e.g. by making the business more efficient.
How do you calculate the gearing Ratio and what does it show?
Gearing %= Non current liabilities / capital employed X 100
It shows how a business has raised its long term finance.
What is high gearing and what does it mean?
A highly geared business is above 50% which means it has 50% or more of its capital in the form of loan, this means its vulnerable to increases in interest rates.
What is a low gearing business and what does it mean ?
Below 50%, this means the business has the opportunity to borrow funds in order to grow and are more likely to be able to borrow more as it shows the business has a secure cash flow or assets.
What are the Pros of ratio analysis?
- can be used to assess the performance of areas of the business.
- Information can be used against industry averages
What are the cons of ratio analysis?
- does not take into account qualitative issues such as brand imge or customer service performance
- does not take into account economic climate/ conditions
