3.7.2 Analysing the existing internal position of a business to assess strengths and weaknesses Flashcards
What is an annual report? What must an annual report include?
A report which explains the company’s performance over the previous year. It must involve financial documents like the income statement and balance sheet.
What is an income statement?
A financial document which shows the profit/loss that has been made over a certain time period.
What is a balance sheet?
A financial statement recording the assets and liabilities of a business at a certain period of time.
What does profit quality measure?
The degree to which the profit is sustainable.
Where does good quality profit come from?
The day to day activities of the business (e.g sales revenue)
Where does poor quality profit come from?
The sale of an asset or division to increase cash flow (these actions are not sustainable)
What is profit utilisation?
The way in which profit is used within a business (e.g dividends or retained profits)
What is a key principle of a balance sheet?
All assets and liabilities must be equal.
What are current assets?
What are non-current assets?
What are current liabilities?
What are non-current liabilities?
What are some strengths of financial data and ratio analysis?
- They provide a valuable source of information to assess performance
- Venture capitalists and bankers regularly use ratios to support their analysis when they consider investing in, or loaning to businesses.
What are some limitations of financial data and ratio analysis?
- A balance sheet is only accurate at one point in time
- Ratios largely look at the past, not the future
- Ratios don’t address issues like product quality, customer service, employee morale
- Window dressing may make accounts look more favourable than they actually are.
What do liquidity ratios measure?
Whether a business has sufficient current assets or cash to be able to pay debts as they fall due.
What do profitability ratios measure?
How effective a business is at generating returns from its trading activities and investments.
What do financial ratios measure?
The rate at which the company sells its inventories and the efficiency with which it uses its assets.
What do gearing ratios measure?
The proportion of business capital provided by debt.
How do you calculate the current ratio?
Current ratio = currents assets/ current liabilities
What is an ideal current ratio?
Between 1.5-2.5 is an ideal current ratio.
How do you calculate the gross profit margin?
(Gross profit/ revenue) x 100
How do you calculate the operating profit margin?
(Operating profit/revenue) x 100
How do you calculate ROCE (Return on Capital Employed)?
(Operating profit/Capital employed) x 100
What is the capital employed?
total equity + non-current liabilities
How do you calculate the gearing ratio?
(non-current liabilities/ capital employed) x 100
