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3.7 STRATEGIC POSITION > Financial Analysis - Ratios > Flashcards

Financial Analysis - Ratios Flashcards

1
Q

What are 3 ways you can analyse financial ratios?

A

Comparing performance over time
Comparing performance against competitors or industry.
Benchmarking against best-in-class businesses

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2
Q

What is the danger of comparing performance in just one year?

A

Could hide a longer-term issue

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3
Q

What is the positive of looking at performance over several years?

A

Possible to see whether a trend is emerging

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4
Q

What does comparing performance against competitors provide?

A

A useful way for managers and shareholders to assess performance

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5
Q

What is benchmarking?

A

Comparison against other businesses that are not direct competition

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6
Q

How is benchmarking helpful?

A

Helps set the standard that the business aims to achieve

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7
Q

Who is analysing Return-on-capital-employed useful for?

A

Large organisations with more significant capital investment

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8
Q

What does analysing ROCE not take into account?

A

Other functional factors or market value of assets

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9
Q

Why is analysing current ratio useful?

A

When assessing ability to pay short term debt

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10
Q

What is current ratio dependent on?

A

the valuation of stock and turnover expectation

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11
Q

What does high gearing mean?

A

Company owes more than it owns

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12
Q

What does it mean in terms of shareholders if high gearing?

A

Fewer shareholders so more control of decisions

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13
Q

What does low gearing mean?

A

Company owns more than it owes

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14
Q

What does inventory turnover depend on?

A

Nature of the product e.g perishability

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15
Q

What does the liquidity of an asset mean?

A

How easily it can be turned into cash and used to buy things

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16
Q

What is a business if they don’t have enough current assets to pay its liabilities when they are due?

A

Insolvent

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17
Q

How can liquidity be improved?
2 things

A

Decreasing stock levels
Slowing down payments to creditors

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18
Q

What does a liquidity ratio show?

A

How solvent a business is

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19
Q

How do you calculate current ratio?

A

Current assets divided by current liabilities

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20
Q

What is the ideal current ratio?

A

2:1

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21
Q

What does a profitability ratio show?

A

Profit margin

22
Q

How is ROCE calculated?

A

Operating profit divided by capital employed X100

23
Q

How do you calculate capital employed?

A

Total assets minus current liabilities

24
Q

What does the ROCE tell you?

A

How much money is made by the business compared to how much money has been put into the business

25
Q

What is a good ROCE?

A

Higher the better

26
Q

How can ROCE be improved?

A

By paying off debt to reduce non-current liabilities

27
Q

What do efficiency ratios show managers and shareholders?

A

How well the business is using its resources

28
Q

What does high gearing mean? In detail

A

High level of debt (long-term) vs equity on its capital employed

29
Q

How can a company benefit from high gearing?

A

In periods of low interest rates

30
Q

What does low gearing mean for interest payments on loans?

A

Limits it so if rates are high, this maximises profit

31
Q

What does inventory held for depend on?

A

On the industry

32
Q

What does inventory turnover mean?

A

Shows how many times a company has sold or replaced inventory in a given period

33
Q

What do some businesses do for high inventory turnover?

A

JIT

34
Q

What are receiveable days?

A

Average length of time taken by customers to pay amounts owed

35
Q

Why is it best to have low receiveable days?

A

Helps cash flow and working capital

36
Q

What can you compare receiveable days ratios with?

A

Previous months or years to look for trends

37
Q

What does aged receiveables analysis let managers do?

A

Control receiveables days

38
Q

What does gearing show potential investors?

A

Where a business’s finance has come from

39
Q

What is a high gearing?

A

Over 50%

40
Q

How does gearing show how vulnerable a business is to changes in interest rates?

A

The more the business is borrowing, harder they will be hit by interest rates

41
Q

What does a high gearing tell you? 2 points

A

More than half of the business’s finance comes from long-term debt
Willing to take risks

42
Q

What does a low gearing tell you? 2 points

A

Most long-term funds come from shareholders and not borrowing
Risk averse

43
Q

What are 2 rewards of being a high-geared business?

A

Extra funds for expansion
When interest rates are low, high gearing is less risky

44
Q

What are 2 risks of being a high-geared business?

A

Might not be able to afford the repayments
Can be risky due to interest rates

45
Q

What is the reward for shareholders if you have a high gearing?

A

Shareholders may expect higher dividends and a big increase in share price - could sell shares for profit

46
Q

What is the risk for shareholders if you have a high gearing?

A

Business may fail if can’t keep up with repayments and shareholders can lose all money they have invested.

47
Q

Why are ratios a good way at looking at performance over-time?

A

Used to spot trends and strengths and weaknesses

48
Q

What are 2 disadvantages with financial ratios?

A

External factors aren’t reflected
Only contain info about past and present

49
Q

What are payables days?

A

Average length of time taken by a business to pay amounts it owes

50
Q

What can a high figure of payables suggest?

A

Liquidity problems

51
Q

Is it better to have a higher or lower figure for payable days?

A

Higher figure is Better because the longer it takes means that there is cash in the bank which is good for cash flow.

3.7 STRATEGIC POSITION (8 decks)

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