7.2 Financial ratio analysis Flashcards
What is ROCE
Return on Capital Employed:
Allows a business to compare operating profit with the total capital employed by the business
How to calculate ROCE
operating profit / total capital employed X 100
How to calculate capital employed
total equity + non-current liabilties
What is current ratio
Allows a business to explore its liquidity by comparing current assets and current liabilities
How to calculate current ratio
Current assets / current liabilities
What do gearing calculations show
The proportion of long-term funding which comes from debt
How to calculate gearing
Non-current liabilities / capital employed) X 100
What are payable days
The time taken for a business to pay those it owes money to
How to calculate payable days
Payables / Cost of sales X 365
What are receivable days
The time taken for a business to collect the money that it is owed
How to calculate receivable days
Receivables / Revenue X 365
Advantages of using financial ratios to assess performance
- Allows a business to compare performance across years
- Allows a business to compare its performance to competitors but only if their information is available
Disadvantage of using financial ratios to assess performance
Does not take into consideration non-financial information e.g changes in the external environment
