Chapter 9 repeated Flashcards
Are financial ratios required at law?
No - you use them to understand more the direction of the company
If you like what is on top of the ratio more than the bottom what does that mean
You want it increasing year on year
If you like what is on bottom of the ratio more than the top what does that mean
I want to see it decreasing
What are the two sets of ratios
General ratios
Insurer ratios
What is a profitability ratio measured in
A percentage
What is a liquidity ratio measured in
A number
General ratio
What are the three profitability ratios
Gross profit
Net profit
ROCE
What is productivity ratios measured in
Days
What are activity ratios measured in
A number
Why are activity and productivity ratios confused
They measure the same thing but the opposite way round
General ratio
What is a gross profit ratio
Profitability ratio. Only for companies with stock
General ratio
What is a gross profit ratio formula
Gross Profit / Sales x 100
General ratio
What do the results of a gross profit ratio show
Decrease: Not good
Increase: Good - means can charge more. Better margin
General ratio
What is ROCE
Profitability ratio. Return on capital employed. Compares company to company
General ratio
What is ROCE formula
Profit before interest and tax/ share capital + reserves + borrowings x 100
General ratio
Do you want a high ROCE
Yes. It shows how well you are using shareholder money
General ratio
What does it show with a low ROCE
Not good. Could be wiped out in a recession.
General ratio
What is a liquidity ratio
Shows you’ve got enough current assets to meet short term liabilities
General ratio
With a liquidity current ratio what percentage does it need to be above.
Above 1 minimum. Otherwise short term debt is higher than short term assets. 2 is good. 1.5 okay.
General ratio
What is the liquidity current ratio formula
current assets / current liabilities
General ratio
What is the liquidity quick ratio formula
current assets excl stock/ current liabilities
General ratio
When would you use the liquidity quick ratio formula
when you’re concerned stock isn’t turning over
General ratio
What would the number for the liquidity quick ratio usually be
Below 1 - means they have paid their creditors.
General ratio
What is the stock turnover ratio formula
Activity ratio. Cost of sales/ stock
General ratio
Why would you use the stock turnover ratio formula
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
General ratio
What is a gearing ratio
This shows where the company gets its money from.
General ratio
What is a gearing ratio formula
long term borrowings / shareholders equity x 100
General ratio
What is a gearing ratio formula expressed as
A percentage
General ratio
What does it mean if a gearing ratio is high
Depends more on borrowing. if 110% = high geared company.
General ratio
What does it mean if a gearing ratio is low
Lowed geared company. Which means you get more money from shareholders than banks.
General ratio
Gearing ratios between 25 and 50 are what
They are typical/ normal
General ratio
Gearing ratios are 110% what does that mean
High - highly geared
General ratio
Gearing ratios are 10% what does that mean
Low - low geared
Insurance ratios
What is the claims ratio
Claims incurred net of reinsurance / earned premium net of reinsurance x 100
Insurance ratios
What is the expenses ratio
Administrative expenses/ earned premium net of reinsurance x 100
Insurance ratios
What is the commission ratio
acquisition costs/ earned premium net of reinsurance x 100
Insurance ratios
What is the combined ratio
claims + expenses + acquisition costs / earned premium net of reinsurance x 100
top is money out and bottom is money in
Insurance ratio
What will be a good combined ratio
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.
Insurance ratios
What do you expect he commission ratio o be around
10 - 20%
Insurance ratio
Can an insurer make money where the combined ratio is over 100%
Yes - it all depends on the investment income. If this is higher than the claims loss than still make money.
General ratio
What is the net profit percentage ratio
Net profit/ sales x 100
General ratio
What happens if the net profit percentage ratio deceases
BAD.
General ratio. What is the net profit percentage ratio is between 5 - 10%
Good.
Insurance ratio
What is the solvency ratio
net assets / earned premium net of reinsurance
Insurance ratio
If the solvency ratio is high what does that mean
The stronger the company
Insurance ratio
What is the gearing ratio
Long- term borrowings /shareholders equity x 100
Insurance ratio
What is the standard range for gearing ratio
10 to 25%
Insurance ratio
What is a low geared range for gearing ratio
less than 10% - good.
Insurance ratio
What is a high geared range for gearing ratio
above 40% - cannot finance its own activities
