3.7 Flashcards
What is a Balance Sheet?
A Document that Sumerises the businesses net worth of a business at a given point in time
What is an Income Statement?
A Document that summarises a businesses trading activities and expenses to show wether the business has made a profit or a loss
Give the steps of a ratio from 1 to 7
1) Identify reason for Investigation
2) Decide on relevant ratios
3) Gather relevant information
4) Interpret ratio
5) Make Appropriate comarisons
6) Take action based on results
7) Apply the above process again to measure success of the actions taken in stage 6
What are the 3 main 3 Ratio analysis questions?
1) How is the business trading?
2) How strong is their financial Position?
3) What are the future opportunities for the business
What is a Interfirm?
Comparing 2 Different firms
EG: Tescos and Sainsbury’s
What is an Intrafirm?
Comparing within the firm
What does IFRS stand for?
International Financial Reporting Standards
What does SWOT stand for?
Strength. Weakness. Opportunity. Threat
Charli smells
What does ROCE stand for?
Return on capital employed
What does a Gear Ratio do?
Shows how a business is financed + Is concerned with long term financial stability of a business
What is the equation for ROCE?
Operating Profit/Profit Before Tax Divided By Total Equity + Non-Current Liabilities X100
If
Operating Profit = £280,000
Capital Employed = £ 1,400,000
what is ROCE?
20
What are a businesses 4 functional areas?
Finance
Marketing
Operations
Human Resources
What are some limitations of financial performance indecators (List 3)
1) Limited focus (Wishes of the shareholders)
2) Focus on short term
3) Internal Perspective, the success of the business can depend on external factors
What is Labour Turnover
Employees entering and leaving the business
What is a core competence?
Something Unique A Business Has/ Something A Business Can Do Strategically Well
What are the 3 Elements of Elkington’s triple bottom line?
People,Planet,Profit
What is the equation for Liquidity ratio?
Current assets divided by current liabilities
What are Liquidity Ratios?
The measure of a businesses ability to survive in the short time
What are 3 benefits of having a strong current assets to liabilities
1) Gives employees confidence
2) Greater motivation for employees
3) Greater relationships with suppliers
What are the 5 forces Michel Porter developed?
1) Degree of rivalry
2) Entry Threat
3) Threat Of Substitutes
4) Barning Power Of Buyers
5) Barning Power Of Suppliers
Short-termism
business prioritising current performance
What are some negatives of short termism?
Focus on short term profits
managers increase share price
shareholders sell shares more often
What are Short-Term Metrics
Metrics that uses the businesses historical performance to help decide if growth + Return on investment for shareholders can be sustained
Whats the equation for Gearing ratio?
non current liabilities divided by capital employed (Total Equity + Non-Current Liabilities) X100
What is a High Gearing Ratio?
When the company has more debt than it does Equity
What is a benefit of high capital gearing?
Relatively few shareholders making it easier for existing shareholders to keep control of the business
What Does Inventory Turnover Measure?
How many times a year a business sells and replaces its inventory
What Is The Equation For Inventory Turnover?
Cost Of Sales Divided By Inventories
How Can Inventory Turnover Be Increased?
By selling off or disposing of slow moving inventory
Negotiate with seller so inventory can be returned if it doesn’t sell
What uses high inventory turnover?
Fast food restaurants, Supermarkets, etc
What Uses Low Inventory Turnover?
Construction, Engineering, Industrial Distribution, etc
What Is Payback Period?
Method that measures how long it takes for an investment to make enough money to pay back the Investment
What are the benefits of payback period?
1) Simple and easy to calculate
2) Focuses on cashflows
3) Straight forward to compare competing projects
What are the drawbacks of payback period?
1) May encourage short-term thinking
2) Takes no account of the “Time Value Money”
3) Ignores qualitative aspects of the decision
What Is The Equation For Payback Period?
Amount still to be paid back divided by Net cash flow for the year in which the payback occurs X12
What is Cumulative Cash Flow?
Cash Flow from previous year + The net cash flow from that year
What is Capital Investment?
Process of purchasing non-current assets
What’s the Equation For NPV?
Cashflow X Discount factor = Present value
Add up all annual NPV’s then - the initial investment
Pos/ Zero/ Neg
