financial ratio Flashcards
What can we use an income statement for?
Gross/Operating profit margin
What can a balance sheet be used for?
liquidity/gearing/efficiency ratios
What is non-current liabilities and current liabilities? (balance sheets)
debts not expected to pay in a year and debts due within a year
What is current assets (balance sheet)
Assets to use/sell within a year - pay off liabilities
What does balance sheets help us understand about the business?
Equity
Liabilities
How the business is financed
What does income statements help us understand about the business?
Changes in sales revenue
Operating costs
What does Profitability ratio show
Compare profit to revenue and investment (performance)
How does knowing profitability ratios help?
Compare the performance
Change aspects (eg operations/price) to reduce costs to gain profit
What are the profitability ratios equations (3)
gross profit margin = gross profit/revenue x 100
net profit margin ^
operating profit margin ^
What does return on capital employed (ROCE) ratio show
how effective they make profit from the investment
How to improve ROCE
increase operating profit
reduce capital employed
ROCE equation
operating profit/capital employed (total equity and non current liabilities)
What does current ratio show
its a liquidity ratio, showing if the business has capital to pay short-term debts
current ratio equation
current assets/current liablities
What is the problem with a current ratio less than 1
Struggle to pay short term debts
What does a Gearing ratio show
how raised long-term finance, how much is from loans
What is the result of high geared business
More than 50% capital is loans
Vulnerable to increases in interest rates
What is inventory turnover ratio show
success at making inventory into revenue
Inventory turnover ratio equation
Cost of goods sold/ average inventory help
What is recieveable days
Time taken for business to collect debts
Receiveable days ratio
Receiveable/revenues x 365
Is a shorter receivable days ratio better or worse? How does it affect cash flow
Shorter is better because can meet cash outflows
What is payable days ratio
How long it takes for business to pay its creditors
Payble days equation
Payables/Cost of sales x 365
