3.5.2- ratio analysis

Question 1

What is ratio analysis?

Answer 1

Quantitive method of gaining insight into a company’s liquidity and profitability by studying its financial statements such as the statement of financial position

Question 2

What is the ideal current ratio?

Answer 2

1.5-2.1

Question 3

What does it mean if a business has a current ratio of above or below 1.5 or 2.1?

Answer 3

Below- business may not have enough working capital to cover their bills
Above- money in business is tied up and not being used efficiently

Question 4

What is gearing ratio equation and what does it look at?

Answer 4

Non-current liabilities/ capital employed x100
Looks at long term finance of the business and where it comes from

Question 5

What is return of capital employment (ROC)

Answer 5

Measure of profitability of the business
Operating profit/ capital employed x100

Question 6

What are ratio limitations?

Answer 6

-just a snapshot of the business on one day, and markets are dynamic so figures can change
- must be seen in industry context