3.7.2 Analysing The Internal Position Of A Business To Assess Strengths And Weaknesses: Financial Ratio Analysis Flashcards
What are assets?
Assets is anything that a business owns
What are non current assets
Assets that the business is likely to keep for more than a year eg. Land, property
What are current assets
Assets that are likely to be exchanged for cash within the accounting year, before the next balance sheet is made.
How is net assets calculated
Non current assets + current assets
What is current liabilities
Debts which needs to be paid off within a year. Eg overdrafts.
What is a non current liability
A debt that can be paid off long term and could be paid off several years eg. Bank loan mortgages.
What is a balance sheet
A Snapshot of a businesses finances at a fixed point in time.
What is working capital
The amount of cash and assets that the business has available to pay off its day to day debts.
How to calculate working capital
Current assets - current liabilities
What is capital expenditure
Means money to use to buy non current assets
What is depreciation
A drop in value of a business asset over time
Why do business calculate depreciation
To make sure that an assets value on the balance sheet is a true reflection of what the business would get from selling it.
What does a balance sheet show
How much the business is worth
What does an income statement show?
Shows how much money has been coming into the company (revenue) and how much has been going out (expenses)
Income statements shows 5 different measures of profit
-gross profit (revenue - cost of sales)
-operating profit ( gross profit- operating expenses)
-profit before tax
-profit after tax (profit for the year)
-retained profit (once shared to shareholders.
How can income statements be used to assess financial performance
-Gross profit shows the money being made from actually making and selling products. If profit is low managers need to look at ways of reducing costs
-retained profit shows how much internal finance is available that can be used to invest.
How is financial analysis is useful
-Can be good at comparing competitors perform.
- investors can use this to decide whether they want to invest or not.
However financial analysis can be unuseful as :
-it only takes into account financial data and does t look at qualities data that potential investors will be looking for.
-external factors are not reflected in an income statement.
Current ratio
Current assets divided by current liabilities
ROCE formula? (Return on capital employed)
Operating profit divided by (total equity+non current liabilities) x100
Inventory turnover formula
Cost of sales divided by cost of average stock held.
Payable days formula
Payables
—————
Cosy of sales X365
Receivable days formula
Receivables divided by sales revenue x365
Gearing (%) formula
Non current liabilities
——————————-
Total equity +non current
Liabilities. X100
Ratio analysis effectiveness
Benefits
-can be useful for looking at a businesses performance over a long period of time.
-can help with managers decision making.
However…
-these trends need to take into account of variable factors eg inflation.
