Chapter 9 repeated

Question 1

Are financial ratios required at law?

Answer 1

No - you use them to understand more the direction of the company

Question 2

If you like what is on top of the ratio more than the bottom what does that mean

Answer 2

You want it increasing year on year

Question 3

If you like what is on bottom of the ratio more than the top what does that mean

Answer 3

I want to see it decreasing

Question 4

What are the two sets of ratios

Answer 4

General ratios
Insurer ratios

Question 5

What is a profitability ratio measured in

Answer 5

A percentage

Question 6

What is a liquidity ratio measured in

Answer 6

A number

Question 7

General ratio
What are the three profitability ratios

Answer 7

Gross profit
Net profit
ROCE

Question 8

What is productivity ratios measured in

Answer 8

Days

Question 9

What are activity ratios measured in

Answer 9

A number

Question 10

Why are activity and productivity ratios confused

Answer 10

They measure the same thing but the opposite way round

Question 11

General ratio
What is a gross profit ratio

Answer 11

Profitability ratio. Only for companies with stock

Question 12

General ratio
What is a gross profit ratio formula

Answer 12

Gross Profit / Sales x 100

Question 13

General ratio
What do the results of a gross profit ratio show

Answer 13

Decrease: Not good
Increase: Good - means can charge more. Better margin

Question 14

General ratio
What is ROCE

Answer 14

Profitability ratio. Return on capital employed. Compares company to company

Question 15

General ratio
What is ROCE formula

Answer 15

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

Question 16

General ratio
Do you want a high ROCE

Answer 16

Yes. It shows how well you are using shareholder money

Question 17

General ratio
What does it show with a low ROCE

Answer 17

Not good. Could be wiped out in a recession.

Question 18

General ratio
What is a liquidity ratio

Answer 18

Shows you’ve got enough current assets to meet short term liabilities

Question 19

General ratio
With a liquidity current ratio what percentage does it need to be above.

Answer 19

Above 1 minimum. Otherwise short term debt is higher than short term assets. 2 is good. 1.5 okay.

Question 20

General ratio
What is the liquidity current ratio formula

Answer 20

current assets / current liabilities

Question 21

General ratio
What is the liquidity quick ratio formula

Answer 21

current assets excl stock/ current liabilities

Question 22

General ratio
When would you use the liquidity quick ratio formula

Answer 22

when you’re concerned stock isn’t turning over

Question 23

General ratio
What would the number for the liquidity quick ratio usually be

Answer 23

Below 1 - means they have paid their creditors.

Question 24

General ratio
What is the stock turnover ratio formula

Answer 24

Activity ratio. Cost of sales/ stock

Question 25

General ratio Why would you use the stock turnover ratio formula

Answer 25

Activity ratio. Show how quickly stock turnover over. The lower = the better. e.g if selling every 7 days that is better than every 90 days

Question 26

General ratio What is a gearing ratio

Answer 26

This shows where the company gets its money from.

Question 27

General ratio What is a gearing ratio formula

Answer 27

long term borrowings / shareholders equity x 100

Question 28

General ratio What is a gearing ratio formula expressed as

Answer 28

A percentage

Question 29

General ratio What does it mean if a gearing ratio is high

Answer 29

Depends more on borrowing. if 110% = high geared company.

Question 30

General ratio What does it mean if a gearing ratio is low

Answer 30

Lowed geared company. Which means you get more money from shareholders than banks.

Question 31

General ratio Gearing ratios between 25 and 50 are what

Answer 31

They are typical/ normal

Question 32

General ratio Gearing ratios are 110% what does that mean

Answer 32

High - highly geared

Question 33

General ratio Gearing ratios are 10% what does that mean

Answer 33

Low - low geared

Question 34

Insurance ratios What is the claims ratio

Answer 34

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

Question 35

Insurance ratios What is the expenses ratio

Answer 35

Administrative expenses/ earned premium net of reinsurance x 100

Question 36

Insurance ratios What is the commission ratio

Answer 36

acquisition costs/ earned premium net of reinsurance x 100

Question 37

Insurance ratios What is the combined ratio

Answer 37

claims + expenses + acquisition costs / earned premium net of reinsurance x 100 top is money out and bottom is money in

Question 38

Insurance ratio What will be a good combined ratio

Answer 38

The lower the better. under 100 is a good start as it means you've made underwriting profit. Over 100% means you've made an u/w loss.

Question 39

Insurance ratios What do you expect he commission ratio o be around

Answer 39

10 - 20%

Question 40

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

Answer 40

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

Question 41

General ratio What is the net profit percentage ratio

Answer 41

Net profit/ sales x 100

Question 42

General ratio What happens if the net profit percentage ratio deceases

Answer 42

BAD.

Question 43

General ratio. What is the net profit percentage ratio is between 5 - 10%

Answer 43

Good.

Question 44

Insurance ratio What is the solvency ratio

Answer 44

net assets / earned premium net of reinsurance

Question 45

Insurance ratio If the solvency ratio is high what does that mean

Answer 45

The stronger the company

Question 46

Insurance ratio What is the gearing ratio

Answer 46

Long- term borrowings /shareholders equity x 100

Question 47

Insurance ratio What is the standard range for gearing ratio

Answer 47

10 to 25%

Question 48

Insurance ratio What is a low geared range for gearing ratio

Answer 48

less than 10% - good.

Question 49

Insurance ratio What is a high geared range for gearing ratio

Answer 49

above 40% - cannot finance its own activities