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Q: What are the learning outcomes of ratio analysis?
A: Understand the importance and advantages of using ratios; Understand how the financial statements and ratios interact; Calculate profitability, efficiency, and performance ratios
Q: What are the advantages of using ratios in financial analysis?
A: Easy to calculate and understand; Simplify data into key indicators to highlight trends and variances; Provide a solid basis for further investigations
Q: What are profitability ratios used for in financial analysis?
A: To assess how profitable an entity is and compare profitability over time; To evaluate how effectively entities are controlling their production costs
Q: What is the Gross Profit % ratio used for?
A: To assess how effectively entities are controlling their production costs; Determines the profitability % after deducting the direct costs of production of goods sold
Q: What does the Operating Profit % ratio measure?
A: Profitability % on the basis of revenue after deducting all operating costs but before taking into account the effects of net finance costs and income tax
Q: What does Return on Capital Employed (ROCE) measure?
A: Expresses the relationship between the operating profit generated during a period and the average long-term capital invested in the business
Q: What do efficiency ratios measure?
A: Measure how effectively and productively the resources of the organization are being used in the generation of revenue and profit
Q: What is the Non-Current Asset Turnover ratio used for?
A: Compares sales to non-current assets used in the organization to measure £s of sales per £ of non-current assets
Q: What do performance ratios focus on in financial analysis?
A: Performance ratios focus on measures like Earnings Per Share (EPS), Price/Earnings (P/E) ratio, Dividends Per Share (DPS), Dividend Yield, and Dividend Cover.
Q: Why is it important to compare a company’s financial ratios to competitors?
A: To understand how well a company is performing relative to similar companies in the industry and to identify areas for improvement.
