Exam Revision: Ratios Flashcards
What is the Return on Equity Ratio? What is the Acceptable Result?
Measures rate of return from the owner’s investment in the business.
Acceptable Result - HIGHER the better
What is the Return on Total Assets Ratio? What is the Acceptable Result?
Measures rate of return based on the business assets. (How well business assets are performing)
Acceptable Result - HIGHER the better
What is the Profit Margin Ratio? What is the Acceptable Result?
% of final profit figure generated from sales of the business.
Acceptable Result - HIGHER the result the better
What is the Expense Ratio? What is the Acceptable Result?
Looks at impact of individual expense against sales of the business.
Acceptable Result - LOWER the better
What is the Gross Profit Margin Ratio? What is the Acceptable Result?
measures rate of return of profit made directly from the buying and selling of goods to cover operating expenses.
Acceptable Result - HIGHER the better
What is the Working Capital Ratio? What is the Acceptable Result?
Measures business’s ability to repay short-term debts within 12 months.
Acceptable Result - Between 1-2
What is the Quick Ratio? What is the Acceptable Result?
Measures business’s ability to repay immediate-term debts within 90 days.
Acceptable Result - 1-2
What is the Debtor’s Turnover Ratio? What is the Acceptable Result?
Time taken for Debtors to repay their debts.
Acceptable Result: Typically 30 Days (Or Business’s credit policy)
What is the Inventory Turnover Ratio? What is the Acceptable Result?
Measures how quickly the business is turning its stock levels over.
Acceptable Result: Faster the better
What is the Debt Ratio? What is the Acceptable Result?
Measures gearing of the firm by measuring the percentage of assets financed by external parties.
Acceptable Result - Below 50%
What is the Debt/Equity Ratio? What is the Acceptable Result?
Measures the gearing of the firm by measuring percentage of assets financed by external parties, compared to internal financing by the owner.
Acceptable Result - Below 100% (LOWER the Better)
What is the Times Interest Earned Ratio? What is the Acceptable Result?
Measures Business’s ability to repay the interest on its exisiting loans out of net profit.
Acceptable Result - HIGHER the better (Minimum 2.5 times)
What does a Poor Debtor’s Turnover Result suggest?
Poor Cashflow and increases chance of future bad debts.
What does a Poor Inventory Turnover Ratio Suggest?
Slow Cash flow - ineffective/outdated stock lines are held for longer periods.
What does a Poor Times Interest Earned Ratio Suggest?
Business would be vulnerable if interest rates were to increase in the future.
