Financial Management Function (5) Flashcards
Profitability ratios examples?
ROCE and ROE
Why is ROCE an important ratio?
You cannot assess profits or profit growth properly without relating them to the amount of funds employed in making the profits
What is ROE?
Compares net profit after interest and tax with the equity that shareholders have invested in the firm
What are debt ratios concerned with/
How much company owes in relation to its size and whether it is getting into heavier debt or improving its situation
Examples of debt ratios?
Gearing
Interest cover
What is interest cover?
A measure of the affordability of interst payments
An interest coverage ratio of less than three times/
It is considered low
Liquidity ratios include/
Current ratio
ACID ratio
What should a liquidity ratio have?
Enough current assets that give a promise of “cash to come” to meet its commitments to pay its current liabilities
A current ratio in excess of 1?
Implies that organisation has enough cash and near-cash assets to satisfy its immediate liabilities
Why use ACID ratio?
When inventory is involved, as inventory is slow at being converted to cash
What are the shareholder investor ratios/
Dividend yield
EPS
PE
What does the value of PE ratio reflect/
Market’s appraisal of share’s future prospects
When a company is more highly regarded and PE ratio?
The higher will be its share price and its PE ratio
What is value for money?
Getting best possible combination of services from the least resources, Maximising benefits for lowest possible cost
Not for profit organisations objective?
Getting good value for money
What does value for money involve
Economy
Efficiency
Effectiveness
What is economy in VFM?
Purchase of inputs of appropriate quality at minimum cost
What is efficiency in VFM?
Use of these inputs to maximise output
What is effectiveness in VFM?
Use of these inputs to achieve its goals (quality, speed of response)
What do not-for-profit organisations mean?
We need to recognise that financial amangement is not always about shareholder wealth maximisation
