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Business JSL > 8 - Ratio Analysis > Flashcards

8 - Ratio Analysis Flashcards

1
Q

What are the 2 liquidity ratios

A

Current ratio

Acid test ratio

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2
Q

How do you work out the current ratio

A

Current assets/current liabilities

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3
Q

How do you present answer for current ratio

A

Answer : 1

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4
Q

What is an ideal value for current ratio

A

2:1

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5
Q

Why is a >1:1 current ratio a concern

A

Indicates cash flow problems

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6
Q

Why is a <2:1 current ratio a concern

A

May be stock that can’t be sold

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7
Q

How to calculate acid test ratio

A

Current assets-stocks/current liabilities

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8
Q

What does an acid test ratio do that current ratio doesn’t

A

Takes into account that a firm may hold large amounts of stock

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9
Q

What are the activity/efficiency ratios

A

Asset turnover
Stock turnover
Debtor collection period
Creditor payment

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10
Q

What does efficiency/activity ratios show

A

How well a business manages its assets and liabilities l, including creditor and debtor days

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11
Q

How to work out asset turnover

A

Revenue/net assets

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12
Q

What is meant by net assets in asset turnover (efficiency ratio)

A

Non current assets

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13
Q

What does the answer for asset turnover tell you

A

The amount of revenue per £ of assets

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14
Q

How to work out stock turnover

A

Cost of sales/average stock held

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15
Q

What does the answer for stock turnover tell you

A

How many times stock is turned over each year

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16
Q

How do you work out how long it takes for stock to be turned over once

A

365/stock turnover

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17
Q

How to work out debtor collection period

A

Debtors/turnover x 365

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18
Q

What does the figure from debtors collection period tell you

A

How many days it takes debtors to pay you back on average

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19
Q

How to work out creditor payment

A

Creditors/cost of sales x 365

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20
Q

What does the figure from creditor payment tell you

A

How many days it takes you to pay back creditors on average

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21
Q

How to work out gearing ratio

A

Long-term liabilities/capital employed x 100

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22
Q

In gearing ratio, what will long term liabilities include

A

Loans and mortgages

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23
Q

What will capital employed include for gearing ratio

A

All investment that year eg loans, shares, retained profits

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24
Q

What does the gearing ratio mean

A

Works out the money that a firm owes back as a percentage of the liabilities’ total value

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25
Q

What can it mean if a business is ‘highly geared’

A

It is high risk

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26
Q

What does interest cover look at

A

The ability for interest payments to be covered by profits

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27
Q

How to calculate interest cover

A

Profit before tax and interest/interest

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28
Q

What is profit before tax and interest also known as

A

Operating profit

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29
Q

What does the answer from interest cover show

A

The number of times a firm can cover interest through profit

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30
Q

What are the profitability ratios

A 
ROCE
Gross profit margin
Net profit margin
Operating profit margin
Return on equity
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31
Q

What does ROCE stand for

A

Return on capital employed

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32
Q

How to work out ROCE

A

Operating profit/capital employed x 100

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33
Q

What does ROCE tell us

A

The value of returns/profits on capital employed, as a percentage of capital employed

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34
Q

How to work out gross profit margin

A

Gross profit/sales revenue x 100

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35
Q

What does the gross profit margin show us

A

What profit the firm makes as a percentage of their sales (minus cost of sales)

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36
Q

How to work out net profit margin

A

Net profit/sales x 100

37
Q

What does the net profit margin tell us

A

Profits as a percentage of sales (after all expenses)

38
Q

How to work out operating profit margin

A

Operating profit/sales x 100

39
Q

What does operating profit margin tell us

A

Profits as a percentage of sales (after expenses)

40
Q

How to work out return on equity

A

Profit for year/value of shares (shareholder equity)

41
Q

What does return on equity tell us

A

How much profit is made per £ of shares

42
Q

What are the shareholder ratios

A 
Earnings per share (EPS)
Price earnings ratio
Dividend per share
Dividend yield
Dividend cover
43
Q

How to calculate EPS

A

Profit for year/number of shares issued

44
Q

What does EPS show

A

How much profit each share has earned over past year

45
Q

How to calculate price earnings ratio

A

Market price of share/EPS

46
Q

What does price earnings ratio show

A

The market price of a share in comparison to what it will earn

47
Q

What does it mean if price earnings ratio = 10

A

The market price is 10x the earnings of that share

48
Q

How to calculate dividend per share

A

Total dividends paid/number of ordinary shares issued

49
Q

What does dividend per share tell you

A

What dividends will be received for each share

50
Q

How to calculate dividend yield

A

Dividend per share (p)/share price(p)

(p) = pence

51
Q

What does dividend yield tell us

A

The dividend per share as a percentage of the share price

52
Q

How to work our dividend cover

A

Profit after tax/dividends

53
Q

What does dividend cover tell us

A

How many times dividends can be paid from net profits

54
Q

What are the three types of investment appraisal

A

Payback
Net present value (NPV)
Average rate of return (ARR)

55
Q

What does payback do

A

Works out how long it will take for an investment to generate enough revenue to cover its initial cost

56
Q

What are the 3 columns in a payback table

A

Net cash inflow
Net cash outflow
Cumulative cash inflow

57
Q

How to work out payback if it’s not exactly a year

A

Cumulative cash flow / net cash inflow

58
Q

Advantages of payback

A

Simple to apply
Preview risk of investment
Tech is improving rapidly

59
Q

Disadvantages of payback

A

Ignores cash flow after payback period

Only includes initial cost

60
Q

What does net present value do

A

Forecast the value of an investment in future years

61
Q

How to work out net present value in net present value table

A

Net return x discount factor

62
Q

Why is discount factor included in net present value

A

Takes into account inflation

63
Q

Advantages of NPV

A

Takes into account inflation

Compare different investment options

64
Q

Disadvantages of NPV

A

Many assumptions

Difficult to calculate

65
Q

What does ARR do

A

Measures the average profit gained as a percentage of the cost of an investment

66
Q

Three steps to calculating ARR

A

1) Calculate total profit
2) Calculate average profit per year
3) average profit/total cost x 100

67
Q

Advantages of ARR

A

Focuses on profit rather than payback

Easy to compare to other potential investments

68
Q

Disadvantages of ARR

A

Uses average profits, even though it may be more profitable at different times
Ignores inflation

69
Q

What is meant by a budget

A

Allocating a set amount of money for a project/investment

70
Q

What is meant by variance

A

The difference between the budget and the actual spending on the project

71
Q

What is a positive variance

A

When spending is lower than the budget

72
Q

What is a negative variance

A

When spending is higher than the budget

73
Q

What does a cash flow forecast show

A

Predictions of indies and outflows in a business

74
Q

Advantages of cash flow forecast

A

Helps to set targets
Help to obtain finance
Spot problems in advance

75
Q

Drawbacks of cash flow forecast

A

Estimations

External factors are not included

76
Q

Where is working capital found

A

On a balance sheet

77
Q

What is working capital

A

Money available for day to day transactions eg buying stock, paying wages

78
Q

How is working capital calculated

A

Current assets - current liabilities

79
Q

What is meant by the working capital cycle

A

The amount of time it takes to turn working capital into actual cash (eg sell stock)

80
Q

How to work out WCC

A

Average working capital/sales revenue x 365

81
Q

What does depreciation mean

A

The reduction in the value of an asset over time

82
Q

What is straight line depreciation

A

Where an asset decreases in value by the same amount each year

83
Q

Advantages of straight line depreciation

A

Easy to understand

Depreciates less at beginning, inflating value of business slightly

84
Q

Disadvantages of straight line depreciation

A

Unsuitable for technology that goes out of date
Assumes lifespan
Inflated value of business in early years

85
Q

What is percentage depreciation

A

Where the value of an asset falls by a set percentage each year

86
Q

Advantages of percentage depreciation

A

Depreciates more at beginning (true)

Keeps some value in later years

87
Q

Disadvantages of percentage depreciation

A

Assumes loss of value in early years

Reduces value of business (maybe harder to borrow money)

88
Q

What is meant by net book value

A

Value of an asset after depreciation is accounted for

89
Q

What is meant by residual value

A

An assets value at the end of its lifetime

Business JSL (11 decks)

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