7.2 Ratio Analysis

Question 1

ROCE ratio

Answer 1

Financial ratio which measures profitability of a business and their capital efficiency

Question 2

Full meaning of ROCE

Answer 2

Return on Capital Employed

Question 3

Formula for ROCE profit

Answer 3

Operating profit/ capital employed*100

Question 4

Capital employed formula?

Answer 4

Total equity+ Non-current liabilities

Question 5

Capital Employed

Answer 5

Represents amount of money the company has invested in its operations and is using to generate profits

Question 6

Current ratio

Answer 6

A.k.a. working capital ratio measures company’s ability to pay short-term obligations such as bills within a year

Question 7

Current ratio formula

Answer 7

Current Assets/ Current liability

Question 8

What is the ideal current ratio

Answer 8

1.5 : 1 and 2:1

Question 9

What happens if the ratio indicates over 2:1

Answer 9

Could mean business may leave excess cash unused rather than investing in other businesses, alternatively means business does very well financially

Question 10

What happens if it is below 1.5: 1

Answer 10

Business might not have enough working capital to cover short-term obligations such as bills or insurance

Question 11

Gearing ratio

Answer 11

Measures how much of a company’s assets is financed by debt (loans) compared to equity

Question 12

Gearing ratio formula

Answer 12

Non-current liabilities/ capital employed*100

Question 13

Gearing ratio above 50%

Answer 13

Usually considered a high gearing ratio, means company is at greater financial risks

Question 14

Gearing ratio between 25% and 50%

Answer 14

Usually considered an optimal or normal gearing ratio for well-established companies

Question 15

Payable days

Answer 15

Shows the average numbers of days it takes for a business to pay its creditors over a period of times

Question 16

Payable days formula

Answer 16

Payable/Cost of sales*365

Question 17

Receivable days

Answer 17

Average number it takes for a customer or debtor to pay back a business

Question 18

Receivable days formula

Answer 18

Receivables/Revenue*365

Question 19

Inventory turnover

Answer 19

Financial ratio that shows how many times a company has sold and replaced their inventory over a financial year

Question 20

Inventory turnover formula

Answer 20

Cost of sales/ Average inventories held

Question 21

Lower or higher inventory turnover?

Answer 21

Lower figure is better as businesses don’t want their stock sitting around as it becomes obsolete