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M92 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

What are the five frequently used ratios

A 
Profitability ratios 
productivity ratios 
liquidity ratios 
activity ratios and 
gearing ratios
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2
Q

What are the main profitability ratios

A

Gross profit percentage
Net profit percentage
Return on capital employed

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3
Q

How do profitability ratios work

A

Compare percentage figures of sales to previous years

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4
Q

What is the gross profit percentage ratio

A

Gross Profit / sales (revenue) x 100

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5
Q

If there is a decrease in the gross profit percentage ratio what does that mean

A

Greater competition in the market causing lower selling prices and a lower gross profit

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6
Q

If there is an increase in a gross profit percentage what does that indicate

A

The company is in a position to exploit the market and charge higher prices for its products

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7
Q

What is the net profit percentage ratio

A

Net profit / sales (revenue/ turnover) x 100

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8
Q

What does it mean if a net profit percentage has decreased while the gross profit percentage has remained the same

A

It might indicate a lack of internal control over expenses

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9
Q

 When a net profit percentage ratio is high or increases over time what does that mean

A

It shows a sign of skilled management

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10
Q

What does it mean if a net profit percentage ratio is low

A

The company maybe deliberately increase in the overhead to cope with a plan the future expansion of the business

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11
Q

What is the return on capital employed ratio

A

profit becore interest charges and tax/ share capital + reserves + borrowings x 100

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12
Q

What does the return on capital employed ratio enable an investor to see

A

Is the insurer is making money for them and make comparisons between companies

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13
Q

What does it mean if there is a low return with the return on capital employed ratio

A

A low return could easily be wiped out in a recession

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14
Q

When acquiring other businesses are moving into new markets should There be a high return on capital employed ratio

A

Yes to make it worthwhile for the capital providers

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15
Q

What does it mean if there is a persistent low return on capital employed ratio

A

It may signal that it is time to dispose of it

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16
Q

What are the three profitability ratios

A

Gross profit percentage ratio, net profit percentage ratio, return on capital employed ratio

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17
Q

What is profitability

A

It compares the money value of the output with the money value of the input the difference between the two is a profit

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18
Q

What is productivity

A

It compares input an output directly so does not use money as a measuring rod

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19
Q

Which ratio provides an indication of how successful the debt collection has been

A

Trade receivables, debtors/ sales x 365 days

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20
Q

What is a payables/creditors efficiency ratio

A

Payables/creditors divided by purchase x 365 days

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21
Q

which Ratio indicates the average number of days inventory/stock is held for

A

The inventory/stock turnover

Inventory, stock / cost of sales x 365 days 

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22
Q

What does a lengthening in the inventory/stock turnover period indicate

A

Slowing down of trading all the necessary build a stock/inventory

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23
Q

B- What are profitability ratios measured in

A

Percentages

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24
Q

B- What are liquidity ratios measured as

A

Numbers

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25
Q

B- What are productivity ratios measured in

A

Days

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26
Q

B- What are activity ratios measured in

A

Numbers

27
Q

B- What are gearing ratio is measured in

A

Percentages

28
Q

B- If the return on capital employed ratio is high what does that mean

A

The higher the better as it shows how well they were using the shareholders money

29
Q

B- Which ratio is all about showing how well a business is using the money they have been given regardless of the source

A

Return on capital employed ratio (ROCE) 

30
Q

What are liquid assets

A

Assets that are either money or can we turn into money at short notice for example a short-term loan

31
Q

What is the current ratio on the liquidity ratios

A

Current assests / current liabilities

32
Q

B- For the current ratio if a figure is over 1.5 what does that mean

A

That the company is desirable and normal

33
Q

B- For the current ratio if the figure is below one what does that indicate

A

That their short-term debt is higher than the short-term assets

34
Q

What is an example of a business that can trade with a low current ratio

A

Supermarket

35
Q

What is the liquidity quick ratio

A

Current assets excluding stock divided by current liabilities

36
Q

B- It’s a ratio is below one under a quick ratio what does that mean

A

It isn’t a normal put made me the company would require an overdraft facility/ may cave

37
Q

What do activity ratios do

A

They compare some aspects of the companies activities (usually sales or purchases) with the relevant balance sheet item

38
Q

What is the stock turnover ratio

A

Cost of sales/ average stock

39
Q

Under the stock turnover ratio Ibstock it turned over more slowly what does that mean

A

Bad as less cash is generated and relatively more cash is tied up in stock

40
Q

What is a debt turnover ratio

A

Sales/ debtors

41
Q

What is the credit turnover ratio

A

Purchaes/ creditors

42
Q

Under the credit turnover ratio what happened if there is an increase in the credit period

A

If it takes longer to pay suppliers effect the same if we borrowed more money to pay them the business had more liquidity that it would have otherwise

43
Q

Which ratio is the best to measure a companies future

A

The gearing ratio

44
Q

B- What is the gearing ratio

A

Long term borrowing/ shareholders equity x 100

45
Q

B- What does it mean if the gearing ratio is high

A

The higher the percentage the more the company relies on borrowing

46
Q

B- If you have a gearing ratio between 25 to 50% how would you describe it

A

This is normal. Higher is high lower is low. 

47
Q

What is a company with a high gearing ratio refer to as

A

Being highly leveraged

48
Q

What is the solvency ratio

A

Net assets/ earned premium net of reinsurance

49
Q

The higher the figure for the solvency ratio means what

A

The stronger the company

50
Q

What is the solvency Coverage ratio

A

Surplus regulatory capital/ regulatory capital required

51
Q

What is the liquidity ratio formula for insurance

A

Total liabilities/ cash plus investments

52
Q

What is the return on equity ratio

A

Profit after tax/ shareholders equity x 100

53
Q

By a rough guide the investor should be making what time is the amount on the return of equity ratio

A

2.5 times. The higher figure merging the better the return

54
Q

What is the insurance gearing ratio

A

Long-term borrowings/ shareholders equity x 100

55
Q

Is it common for insurer that chooses to use debt capital to have a gearing ratio in a range of 10 to 25%

A

Yes

56
Q

Insurance company with a gearing ratio below 10% would be regarded as what

A

Having a low level of gearing and above 40% as highly geared

57
Q

What does the combined ratio measure

A

The underwriting performance 

58
Q

What is the combined ratio

A

Claims + administrative expenses+ Acquisition costs/ Earned premium net of reinsurance x 100

59
Q

B- If a combined operating Ratio is under 100 what does that indicate

A

The lower the better

60
Q

B- If the combined ratio it’s over 110% is it good or bad

A

It is bad and is usually classed as an underwriting a loss

61
Q

What is the commission ratio

A

Acquisitions/commissions ratio divided by Earned premium net of reinsurance x 100

62
Q

What is a good commission ratio

A

Usually between 10 to 20%

63
Q

What is the outstanding claims ratio

A

Outstanding claims net of reinsurance/ Net assets

%

64
Q

If the outstanding claims ratio is lower what does that mean

A

Below are the ratio of the more secure the position

M92 (12 decks)

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