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Credit and Debt Management > Financial ratios > Flashcards

Financial ratios Flashcards

1
Q

Current ratio

A

Current assets / Current liabilities= ….times

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2
Q

Explanation of current ratio

A

It gives an indication of liquidity by showing how many
times the current liabilities are covered by the current assets

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3
Q

Quick ratio

A

Current assets - inventory / current liabilities= ….times

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4
Q

Explanation of quick
ratio

A

A better test of immediate liquidity,
It removes inventory which can take time to sell and corvert into cash

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5
Q

Trade receivables payment period

A

(Receivables/ Credit sales)x 365= …..days

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6
Q

Trade receivables payment period

A

(Receivables / Revenue ) x 365= …… days

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7
Q

Explanation of trade receivables payment period = ….days

A

Shows the average number of days receivables pay take to pay
Show how quickly we can get the money from our customers

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8
Q

Trade payables payment period

A

(Payables / credit purchases ) x 365= …..days

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9
Q

Trade payables period payment

A

(Payables/ COGS ) x 365= …..days

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10
Q

Explanation of trade
payables payment period

A

Shows the average days the business takes to pay their
credit suppliers

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11
Q

Explanation of working capital cycle

A

It measures how long a business needs to fund its purchases of goods
the longer cycle, the longer the business has to find
financing

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12
Q

How to reduce the working capital cycle?

A

The company needs to reduce the amount of time items are kept in stock, reduce the theme it takes to collect debts from customers and
increase the time it takes to pay its suppliers

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13
Q

Inventory holding period

A

(Inventory / COGS ) x365 = …… days

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14
Q

Explanation of inventory holding period

A

Shows the average number of days inventory is
held before it is sold

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15
Q

Operating profit margin

A

(Profit from operations/ Revenue) x 100 = ….. %

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16
Q

Explanation of operating profit margin

A

It shows in our sales what profit we have got remaining after
we paid our operating costs
Falling margin may be due to increased costs of sales, sales
prices being reduced to increase market share

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17
Q

Interest cover

A

Profit from operations / Interest charges= …..times

18
Q

Explanation of interest cover

A

Measures how easily the business can make its
interest payments out of profit

19
Q

Gearing ratio

A

Total debt/ total debt + total equity x 100 =….. %

20
Q

Explanation of gearing ratio

A

Measures the financial risk of the company, when assessing the
coldit status of a customer the credit controller will be concerned with their long-term stability

21
Q

What does high gearing mean in the business?

A

There will be less cash available in the business as the cash balance will have been reduced by high interest payments

Lenders are less likely to want to lend the company more money
so we should be cautious when granting credit

22
Q

Return on capital employed

A

Profit from operations (net profit) / Capital employed x100 = ….. %

Profit from operations / TALC

TALC = total assets less current liabilities

TALC= total equity+ non - current liabilities

23
Q

Explanation of return on capital employed

A

Measures how much profit is generated for every £ of assets employed
Indicates how efficiently the company uses its assets
Compares profits to the overall size of the business

24
Q

Gross profit margin

A

Gross profit /Revenue x 100 = …… %

25
Q

Explanation of gross profit margin

A

How profitable the trading activities of the business are

26
Q

What causes the fall in the gross profit margin ?

A

Increased cost
Reduced volumes
Lower selling price

27
Q

Current ratio - how we use them If a company can be granted credit

A

This ratio shows the amount of current assets in relation to the current liabilities and is a measure of the liquidity of the business. If the company has a ratio of 2:1 it means that for every £ 1.00 of current liabilities the company has £ 2.00 Of current assets. Therefore in theory the business is liquid

28
Q

Making less gross profit from its sales which could
be….

A

Decrease in selling prices and/or an increase in the cost of sales

29
Q

Interest cover

A

Interest Cover is a key indicator that is often used by credit agencies
and financial institutions to calculate how many times the operating profit can cover the interest payments

Interest paid is covered by the profit from operations by …. times

30
Q

Current ratio

A

Higher current ratio indicates a better credit worthiness when assessing a potential credit customer

31
Q

Current ratio is ….

A

A crude measure of solvency

32
Q

Gross profit margin reduction - Why ?

A

The selling price has decreased or the cost of sales has increased

33
Q

The current ratio has fallen because

A

1) Increase in current liabilities
2) Decrease in current assets

34
Q

What has happened to the operating profit margin %?

A

The operating profit margin % has increased from 15.32% to 32.00%.

The percentage has more than doubled, which means the company is generating more profit which in turn should improve liquidity.

35
Q

What has happened to the interest cover?

A

Interest cover has increased from 8.00 to 2.1 times.

The operating profit excellent cover for finance costs, which again indicates higher liquidity.

36
Q

What has happened to the current ratio?

A

The current ratio has also increased from 1.03 to 2.00 times.

The current ratio is a direct indicator of liquidity. It gives an indication of liquidity by showing how many times the current liabilities are covered by the current assets.

37
Q

What has happened to the gearing %?

A

Gearing has dropped from 65.22 to 46.67%.

The company is now less reliant on external financing - and the finance cost of covering that financing- which means that an increase in the credit limit lessens credit risk for the company.

38
Q

What do the positive trends of all four performance indicators imply?

A

The trends of all four performance indicators are very positive and will greatly reduce the level of credit risk, meaning that a positive recommendation may be given to the Finance Director for the increase in credit limit from 50000 to 90000.00.

Performance indicators: Operating profit margin %, Interest cover, Current ratio, Gearing %

39
Q

Current ratio - explanation
Current ratio : 0.38 in 2007
Current ratio: 0.35 in 2006

A

The current ratio has been consistent between the two
years, however, this may be considered low for this
type of business at around 35p or 38p of current assets
for every £ 1.00 of current liabilities

40
Q

Interest cover - reason of decrease

A

Decrease in operating profit margins

41
Q

Quick ratio

A

The business meets its current liabilities by its current assets without the need to
convert inventories to cash

42
Q

Ebitda/ total debt

A

Operating profit + depreciation / total debt

Credit and Debt Management (18 decks)

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