Chapter 9 Flashcards
What are the five frequently used ratios
Profitability ratios productivity ratios liquidity ratios activity ratios and gearing ratios
What are the main profitability ratios
Gross profit percentage
Net profit percentage
Return on capital employed
How do profitability ratios work
Compare percentage figures of sales to previous years
What is the gross profit percentage ratio
Gross Profit / sales (revenue) x 100
If there is a decrease in the gross profit percentage ratio what does that mean
Greater competition in the market causing lower selling prices and a lower gross profit
If there is an increase in a gross profit percentage what does that indicate
The company is in a position to exploit the market and charge higher prices for its products
What is the net profit percentage ratio
Net profit / sales (revenue/ turnover) x 100
What does it mean if a net profit percentage has decreased while the gross profit percentage has remained the same
It might indicate a lack of internal control over expenses
 When a net profit percentage ratio is high or increases over time what does that mean
It shows a sign of skilled management
What does it mean if a net profit percentage ratio is low
The company maybe deliberately increase in the overhead to cope with a plan the future expansion of the business
What is the return on capital employed ratio
profit becore interest charges and tax/ share capital + reserves + borrowings x 100
What does the return on capital employed ratio enable an investor to see
Is the insurer is making money for them and make comparisons between companies
What does it mean if there is a low return with the return on capital employed ratio
A low return could easily be wiped out in a recession
When acquiring other businesses are moving into new markets should There be a high return on capital employed ratio
Yes to make it worthwhile for the capital providers
What does it mean if there is a persistent low return on capital employed ratio
It may signal that it is time to dispose of it
What are the three profitability ratios
Gross profit percentage ratio, net profit percentage ratio, return on capital employed ratio
What is profitability
It compares the money value of the output with the money value of the input the difference between the two is a profit
What is productivity
It compares input an output directly so does not use money as a measuring rod
Which ratio provides an indication of how successful the debt collection has been
Trade receivables, debtors/ sales x 365 days
What is a payables/creditors efficiency ratio
Payables/creditors divided by purchase x 365 days
which Ratio indicates the average number of days inventory/stock is held for
The inventory/stock turnover
Inventory, stock / cost of sales x 365 days 
What does a lengthening in the inventory/stock turnover period indicate
Slowing down of trading all the necessary build a stock/inventory
B- What are profitability ratios measured in
Percentages
B- What are liquidity ratios measured as
Numbers
B- What are productivity ratios measured in
Days
B- What are activity ratios measured in
Numbers
B- What are gearing ratio is measured in
Percentages
B- If the return on capital employed ratio is high what does that mean
The higher the better as it shows how well they were using the shareholders money
B- Which ratio is all about showing how well a business is using the money they have been given regardless of the source
Return on capital employed ratio (ROCE) 
What are liquid assets
Assets that are either money or can we turn into money at short notice for example a short-term loan
What is the current ratio on the liquidity ratios
Current assests / current liabilities
B- For the current ratio if a figure is over 1.5 what does that mean
That the company is desirable and normal
B- For the current ratio if the figure is below one what does that indicate
That their short-term debt is higher than the short-term assets
What is an example of a business that can trade with a low current ratio
Supermarket
What is the liquidity quick ratio
Current assets excluding stock divided by current liabilities
B- It’s a ratio is below one under a quick ratio what does that mean
It isn’t a normal put made me the company would require an overdraft facility/ may cave
What do activity ratios do
They compare some aspects of the companies activities (usually sales or purchases) with the relevant balance sheet item
What is the stock turnover ratio
Cost of sales/ average stock
Under the stock turnover ratio Ibstock it turned over more slowly what does that mean
Bad as less cash is generated and relatively more cash is tied up in stock
What is a debt turnover ratio
Sales/ debtors
What is the credit turnover ratio
Purchaes/ creditors
Under the credit turnover ratio what happened if there is an increase in the credit period
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
Which ratio is the best to measure a companies future
The gearing ratio
B- What is the gearing ratio
Long term borrowing/ shareholders equity x 100
B- What does it mean if the gearing ratio is high
The higher the percentage the more the company relies on borrowing
B- If you have a gearing ratio between 25 to 50% how would you describe it
This is normal. Higher is high lower is low. 
What is a company with a high gearing ratio refer to as
Being highly leveraged
What is the solvency ratio
Net assets/ earned premium net of reinsurance
The higher the figure for the solvency ratio means what
The stronger the company
What is the solvency Coverage ratio
Surplus regulatory capital/ regulatory capital required
What is the liquidity ratio formula for insurance
Total liabilities/ cash plus investments
What is the return on equity ratio
Profit after tax/ shareholders equity x 100
By a rough guide the investor should be making what time is the amount on the return of equity ratio
2.5 times. The higher figure merging the better the return
What is the insurance gearing ratio
Long-term borrowings/ shareholders equity x 100
Is it common for insurer that chooses to use debt capital to have a gearing ratio in a range of 10 to 25%
Yes
Insurance company with a gearing ratio below 10% would be regarded as what
Having a low level of gearing and above 40% as highly geared
What does the combined ratio measure
The underwriting performance 
What is the combined ratio
Claims + administrative expenses+ Acquisition costs/ Earned premium net of reinsurance x 100
B- If a combined operating Ratio is under 100 what does that indicate
The lower the better
B- If the combined ratio it’s over 110% is it good or bad
It is bad and is usually classed as an underwriting a loss
What is the commission ratio
Acquisitions/commissions ratio divided by Earned premium net of reinsurance x 100
What is a good commission ratio
Usually between 10 to 20%
What is the outstanding claims ratio
Outstanding claims net of reinsurance/ Net assets
%
If the outstanding claims ratio is lower what does that mean
Below are the ratio of the more secure the position
