All

Question 1

ROCE

Answer 1

(operating profit/capital employed) x 100

Question 2

Capital employed

Answer 2

total assets + non-current liabilities - current liabilities

(total equity = total assets - total liabilities, so CE can also just be total equity + non-current liabilities)

(basically everything (including non-current liabilities) minus current liabilities)

Question 3

Breakeven

Answer 3

fixed costs/contribution per unit

Question 4

Current ratio

Answer 4

current assets/current liabilities

Question 5

What does the current ratio tell us about a business?

Answer 5

How easy it is for a business to pay back debts - it is how many pounds of assets they have for every pound of debt (ratio:1)

Question 6

What is the ideal current ratio?

Answer 6

2:1

Question 7

Gearing

Answer 7

(non-current liabilities/capital employed) x 100

Question 8

What does gearing tell us about a business?

Answer 8

How much of the business is funded by share capital (equity) vs loans

Question 9

What does it mean to have a high gearing?

Answer 9

The business is mostly funded by loans (and so may be in debt)

Question 10

What does it mean to have a low gearing?

Answer 10

The business is mostly funded by share capital (and so is reliant on shareholders and won’t be able to give out many dividends)

Question 11

Equity

Answer 11

total assets - total liabilities

Question 12

ARR

Answer 12

• Add up all net cash flows/profits
• Subtract initial cost (to get the total return over all the years)
• Divide by the number of years (to get average return per year)
• Divide this by the initial cost and x 100 (to get the ARR as a % of initial investment)

Question 13

What does Average Rate of Return (ARR) look at?

Answer 13

The long-term potential profitability of a business investment

Question 14

Payback period

Answer 14

Calculate how many years and fractions of years (months), it will take to pay back the initial investment (if liquidity is an issue, would want this to be shorter)

Question 15

What does payback period tell us about a business?

Answer 15

How long it will take a business to pay back their initial investment

Question 16

NPV

Answer 16

Apply discount factor to each year’s net cash flow. Add them all up and minus the initial cost (the higher the better)

Question 17

What does Net Present Value (NPV) look at?

Answer 17

The future total value of an investment, taking into account interest rates etc.

Question 18

Trade payables/creditors days

Answer 18

(payables/cost of sales) x 365

Question 19

Trade receivables days

Answer 19

(receivables/revenue) x 365

Question 20

Inventory turnover

Answer 20

cost of goods sold/average inventory

Question 21

What do payables days mean to a business?

Answer 21

The time is takes a business to pay its creditors (the longer the better - cash is retained longer)

Question 22

What do receivables/debtors days mean to a business?

Answer 22

The time it takes a business to collect debts it is owed (the shorter the better)

Question 23

What does inventory turnover mean to a business?

Answer 23

A measure of a company’s success at turning inventory into revenue.
The number of times a company can turn over its stock per year.