Financial Health Ratios Flashcards
What are financial health ratios?
These ratios investigate the short-term and long-term financial stability of a firm by examining the relationships between assets and liabilities.
What is current ratio?
Current ratio measure the firms ability to cover its short-term debts (current liabilities) with its current assets.
What is the formula for current ratio?
Current Assets / Current Liabilities
What’s the recommended current ratio?
1.5 : 1
Higher than this then the business has too much money sitting idle.
Lower than this and the business risks not being able to cover its short-term debts.
What is gearing ratio?
Gearing ratio focuses on the long-term financial health of the business.
Measures the extent to which the company is financed by borrowed money.
What is the calculation for gearing ratio?
(Non current liabilities / Capital Employed) x100
What does the gearing ratio show?
Gearing ratio shows how risky an investment is.
If gearing is more than 50% of capital employed, the company is said to be highly geared.
Higher the gearing, higher the risk due to interest payments on loans.
