3.5.2 Ratio analysis

Question 1

How do you raise gearing?

2

Answer 1

• Buy back ordinary shares

- Obtain ^loans

Question 2

How do you reduce gearing?

3

Answer 2

• Issue ^ordinary shares
• Retain ^profits
• Repay loans

Question 3

How can you improve ROCE and why?

2

Answer 3

• Buy back shares from shareholders

- >Share capital = capital employed falls (no effect on operating prof)

Question 4

What does ROCE express?

1

Answer 4

• Operating profit as % of capital invested into the business

Question 5

Why is higher ROCE better?

1

Answer 5

• Money invested in business is generating a ^return on that investment

Question 6

What should a business do if ROCE falls below current interest rates?
1

Answer 6

• Close, liquidate all assets and put all money in risk free bank for ^return