C4 Analysing Financial Performance Flashcards
Balance Sheet
A balance sheet is a statement of a businesses assets and liabilities at a specific point in time (usually at the end of a trading period)
Components of a balance sheet
- Fixed (or non current) Assets
- Current Assets
- Current Liabilities
- Long term (or non current) Liabilities
- Net Assets
- Net Current Assets
- Shareholders funds
Fixed (non current) Assets
Fixed assets are expected to be retained within the business for at least a year.
Eg. Land, buildings, machinery, and vehicles
Current Assets
Current assets are expected to change vale often, due to the normal course of business trading.
Eg. Stock, debtors, and bank and cash balances.
Current Liabilities
Current liabilities are debts that are usually paid within a year.
Eg. Trade credit, bank overdrafts.
Long Term (or Non-Current) Liabilities
Debts that are paid over more than a year.
Eg. Bank loans, mortgages
Net Assets
Calculated by adding fixed and current assets together, then deducting current and long term liabilities.
Net Current Assets
The difference between current assets and current liabilities, might also be shown in a balance sheet.
Shareholders funds
Money that has been invested into the business by the owners (through the sale of shares), also includes retained profits and reserves.
Working Capital (definition)
Working Capital is the money needed in the business to pay for day-to-day expenses.
Working Capital (Equation)
Current Assets - Current Liabilities
Liquidity
Liquidity refers to how quickly an asset can be converted into cash, and the businesses ability to pay off its short term debts.
Most and least liquid assets
Most- Money in the bank
Least - Stock
Current Ratio
Current assets
———————-
Current liabilities
Given as a ratio to 1 eg. 2.85:1
Ideal range for current ratio
1.5:1 - 2.1:1
A current ratio below 1.5:1 may indicate over borrowing.
A current ratio above 2.1:1 may indicate there is too much money not being put to use
Acid Test Ratio (definition)
The acid test ratio excludes stock from current assets as a way if measuring the ability of a business to meet short term demands for cash more reliably than the current ratio.
Acid Test Ratio (Equation)
Current Assets - Stock
——————————
Current liabilities
What does having an Acid Test Ratio of 1.26:1 mean?
This means that for every £1 that the business owes it has £1.26 available in current assets.
Gearing Ratio
Long Term Liabilities
————————— *100
Capital employed
ROCE (definition)
Return on Capital Employed.
This measures how effectively the capital invested in a business is being used to create profits.
The higher this ratio the better.
ROCE (equation)
Net Profit before tax
—————————————————- *100
Shareholders funds + long term liabilities
What is a risk if ROCE is too low?
The company is at risk of being taken over by another business that could offer the shareholders a better rate of return.
What is a risk if liquidity ratios are too low?
The business may be running into short-term cash flow problems.
What should a company do if it’s gearing ratio is too low?
It may be a good idea for the business to borrow more money to take advantage of opportunities to expand the business.