Finance #3 Flashcards
current ratio
current assets/current liabilities - measures businesses ability to pay back their current liabilities with their current assets
- the higher the current ratio, the more capable the business is of meeting their short-term obligations
- liquidity, short term debt commitments
current ratio - industry average
a ratio of 2:1 indicates a sound financial position for a firm, although an acceptable ratio will also depend on a number of factors
- type of firm
- factors in external environment
gearing
measures the relationship between debt and equity
debt to equity ratio
total liabilities/total equity , shows the extent to which the firm is relying on debt or outside sources to finance the business
debt to equity ratio - industry average
greater than 1 means the business has less equity than debt, ratio between 0 and 1 means that the business has more equity than debt, the higher the ratio, the less solvent the firm
investors would be less attracted to a firm with a higher ratio because this indicates greater financial risk
gross profit ratio
gross profit/sales , shows changes from one period to another, indicating the effectiveness of planning policies concerning pricing, sales, discounts, the valuation of stock
net profit ratio
net profit/sales, represents the profit or return to the owners after all expenses are accounted for
- efficiency
return on equity ratio
net profit/total equity, shows how effective the funds contributed by the owners have been in generating profit
expense ratio
total expenses/sales, indicates the amount of sales that are allocated to individual expenses
mortgage
loan secured by the property of the borrower
- long-term with interest
- interest-only loan is a period of time where the borrower pays the interest of the loan only
overdraft
bank allows business to overdraw its accounts to an agreed limit
- good for cash flow in short-term
- assists with short-term liquidity problems
- typically lower interest rates
commercial bills
type of bill of exchange issued by institutions other than banks
- borrower recieves money immediately, promises payment and interest later
factoring
short-term borrowing to raise funds immediately by selling accounts receivable at a ‘discount’ to a firm that specialises in the practice
- last resort
- ‘without recourse’, full responsibility for them not collecting the accounts receivable
- ‘with recourse’, bad debts will still be the responsibility of the business
- its a temporary solution, therefore more risky
placements
issuing new shares made directly by the company and listed to investors
- also known as raising equity capital
share purchase plan
offer to existing shareholders in a listed company to purchase more shares in that company without brokerage fees
- direct, without a prospectus
