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
private equity
money invested in a private company not listed on the ASX aiming to raise capital to finance future expansion
Banks are also known as
Authorised Deposit-Taking Institutions (ADI)
investment banks
specialise in a provision of services to the business sector
- arranges international finance
- advice on mergers/takeovers
- managing portfolio investment
finance companies
offers ranges of secured and unsecured loans to businesses
- typically higher interest rates
- non-ADI
life insurance companies
provide equity and loans to corporate sector for the insurance premiums for employees
superannuation fund
contributes and provides superannuation by investing shares, government securities and property
gross profit
sales -COGS
net profit
gross profit - expenses
