Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

M92 - andy > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Are financial ratios required at law?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What do you use financial ratios for?

A

To understand more about the accounts/ the direction of the company/ can compare companies in the same sector

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the two sets of ratios in chapter 9?

A

General ratios and insurers ratios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a profitability ratio measured in?

A

A percentage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a liquidity ratio measured in?

A

A number

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is days ratio measured in?

A

Days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What do activity ratios measure?

A

The same thing as productivity ratios but the opposite way round

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are profitability/ Non profitability ratios?

A

Gross profit percentage ratio
Net profit percentage ratio
Return on Capital employed (ROCE ratio)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a Gross Profit ratio

A

A profitability/ non- profitability ratio
Used for companies with stock only
Gross profit / sales (income/ turnover/ revenue) x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What happens if you have a decrease in the Gross Profit ratio

A

Not good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What happens if there is an increase in the Gross profit ratio

A

Good. Can charge customers more/ better margin.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the Return on capital employed (ROCE) ratio?

A

A profitability ratio/ non profitability ratio

profit before interest charge and tax /
share capital + reserves + borrowings
x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Do you want the Return on capital employed ROCE high?

A

Yes. It means that you are showing shareholder money well. Outperforming bank interest rates etc.

The higher the risk the more shareholders will look for better returns on capital.

If you have a ratio of 5% it means you are making 5% on the money it’s been given from bank/ shareholders.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is share capital?

A

he amount of money the owners of a company have invested in the business as represented by common and/or preferred shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the net profit percentage ratio?

A

A profitability ratio/ non profitability ratio

Net profit/ sales (revenue/ turnover) x 100

If it increases over time it shows you have skilled management. If it decreases than the company may be deliberately increasing the overheads to coped with a future expansion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Why is Return on capital employed ROCE ratio an important measure

A

A low return could be wiped out in a recession
When aquiring a new company it should be high
A persistent low ROCE in a business division may signal its time to dispose of this division

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is a liquidity ratio?

A

Shows whether you’ve got enough current assets to meet your short term liabilities. Do you have enough liquid assets available?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

With a liquidity ratio current ratio what figure should it be?

A

Above 1 at a bare minimum. 1.5 is normal. Below 1 you are a business heading towards bankruptcy. Your short term debt is higher than your short term assets (things you can turn quickly into cash)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the current ratio?

A

A liquidity ratio

current assets / current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the quick ratio

A

A liquidity ratio

current assets excl stock/ current liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

When will you use the liquidity quick ratio

A

When you are concerned whether the stock is turning over. When you have stock hanging around becoming obsolete.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What happens if the liquidity quick ratio is lower than one?

A

More obsolete stock which means they can’t sell their stock enough to meet their liabilities. Could go under.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the stock efficiency ratio?

A

An activity ratio

Cost of sales (purchases)/ closing stock

The lower the better. Measured in days. Want it to decrease. If the stock is turned over more slowly then the less cash is generated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the gearing ratio? WILL COME UP

A

Shows where the company gets its money from

Long- term borrowings/ shareholders equity x 100

Will be a percentage

The higher the % the more the company relies on borrowing. If 110% ratio on the gearing ratio = long term borrowings is higher than shareholder funds so will be called a HIGH GEARED COMPANY. Reliance on long term borrowing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is the gearing ratio measured in? WILL COME UP

A

A percentage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Under the gearing ratio, if the long term borrowings is higher than its shareholder funds? WILL COME UP

A

its a high geared company- reliance on long term borrowing?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Under the gearing ratio, if the long term borrowings is a low percentage (15%/20%) WILL COME UP

A

low geared company. Get more from your shareholders than you do your banks.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

A company has a gearing ratio of 25 to 50% what does it mean WILL COME UP

A

Normal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

A company has a gearing ratio of over 50% what does it mean WILL COME UP

A

High. - reliant on long term borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Insurance industry ratios

What is the claims ratio

A

A %

Claims incurred net of reinsurance/ earned premium net of reinsurance x 100

No ideal % so will vary.

31
Q

Insurance industry ratio.

What is the combined ratio?

A

It measures the underwriting performance - is there sufficient premium to cover the cost of claims and expenses?

32
Q

Insurance industry ratio.

If a combined ratio is under 100% what does that mean?

A

A good underwriting performance rather than profitability. If it decreases its good.

33
Q

Insurance industry ratio

If a combined ratio is over 110% what does that mean?

A

Poor underwriting and catastrophe losses

34
Q

Insurance industry ratio

What are the three ratios that drive the combined ratio

A

The claims ratio.
The expenses ratio
The commissions ratio

35
Q

Insurance industry ratio

What is the claims ratio to calculate the combined ratio

A

claims incurred net of reinsurance/ earned premium net of reinsurance x 100

36
Q

Insurance industry ratio

What is the expenses ratio to calculate the combined ratio

A

administrative expenses (u/w, claims costs, offices/ earned premium net of reinsurance x 100

Ideally like it decreasing as it shows you have a control of expenses

37
Q

Insurance industry ratio

What is the commission ratio to calculate the combined ratio

A

acquisition costs/ earned premium net of reinsurance x 100

38
Q

Insurance industry ratio

How do you calculate the combined ratio

A

Claims ratio % + expenses ratio % + acquisition costs % / earned premium net of reinsurance x 100

A good combine ratio is the lower the better. Ideally below 100 at the very least as you’ve made underwriting profit.

39
Q

Can an insurer make money where the combined ratio is over 100?

A

Yes, it all depends on the investment income. If this is higher than the claims loss you still make money.

40
Q

What are the five frequently used ratios

A 
Profitability ratios
productivity ratios
liquidity ratios
activity ratios and
gearing ratios
41
Q

How do profitability ratios work

A

Compare percentage figures of sales to previous years

42
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

43
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

44
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

45
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

46
Q

What is productivity

A

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

47
Q

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

A

Trade receivables, debtors/ sales x 365 days

48
Q

What is a payables/creditors efficiency ratio

A

Payables/creditors divided by purchase x 365 days

49
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

50
Q

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

A

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

51
Q

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)

52
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

53
Q

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

A

Supermarket

54
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

55
Q

What is the stock turnover ratio

A

Cost of sales/ average stock

56
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

57
Q

What is a debt turnover ratio

A

Sales/ debtors

58
Q

What is the credit turnover ratio

A

Purchaes/ creditors

59
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

60
Q

Which ratio is the best to measure a companies future

A

The gearing ratio

61
Q

Insurance ratio

What is the solvency ratio

A

Net assets/ earned premium net of reinsurance

62
Q

Insurance ratio

The higher the figure for the solvency ratio means what

A

The stronger the company

63
Q

Insurance ratio

What is the solvency Coverage ratio

A

Surplus regulatory capital/ regulatory capital required

64
Q

Insurance ratio

What is the liquidity ratio formula

A

Total liabilities/ cash plus investments

65
Q

Insurance ratio

What is the return on equity ratio

A

Profit after tax/ shareholders equity x 100

66
Q

Insurance ratio

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

67
Q

What is the insurance gearing ratio

A

Long-term borrowings/ shareholders equity x 100

68
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

69
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

70
Q

Insurance ratio

What is the commission ratio

A

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

71
Q

What is a good commission ratio

A

Usually between 10 to 20%

72
Q

What is the outstanding claims ratio

A

Outstanding claims net of reinsurance/ Net assets

73
Q

If the outstanding claims ratio is lower what does that mean

A

Below are the ratio of the more secure the position

M92 - andy (27 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions