financial ratios - Flashcards
what does liquidity refer to
a business’s ability to meet its short-term financial goals/commitments (less than 12 months)
what ratio is used to measure liquidity
current ratio
what is the current ratio
current assets/current liabilities
assess what a high current ratio means and a low ratio
the higher the ratio the more liquid the business is. while a lower ratio indicates the business is less liquid
what is the acceptable ratio of the liquidity(current ratio)
2:1
what does too high ratio mean
it means the business is under utilising their current assets effectively
what does solvency refer to
refers to the ability of a business to meet its long-term financial goals/commitments
what is the ratio used to measure solvency
debt to equity ratio
what is the debt-to-equity ratio
total liabilities/total equity
evaluate what the ends of the ratio (i.e. higher and lower) means for the business
the lower the ratio the less geared the business is. The higher the ratio the more highly geared the business is.
what is the acceptable ratio for solvency(debt to equity ratio)
1:1.5
what does profitability refer to
the ability of a business to maximise its profits
what are the ratios for profitability
gross profit ratio, net profit ratio and return on equity ratio
what is the formula for the Gross profit ratio
gross profit/sales
what does a higher/lower gross profit ratio indicate
a higher ratio indicates that the business is likely to be more profitable while a lower ratio indicates that the business is likely to be profitable
what is the formula for net profit ratio
net profit/sales
what does a higher/lower net profit ratio indicate
the higher the ratio that more profitable the business is, and the lower the ratio the less profitable the business is
what is the general ratio % that indicates a sound financial position for profitability
10%
what is the formula for return on equality ratio
net profit/total equity
what does the return on equity ratio measure
how effective the funds contributed by the owners have been at generating profit - essentially the return on their investment
what does a higher/lower return on equity ratio indicate
the higher the ratio, the greater the return on an owner’s investment, while the lower the ratio means the lower return associated with the owner’s investment
what is the acceptable ratio % of return on equity ratio
10%
what are the ratios for efficiency
expense ratio and accounts receivable turnover ratio
what is efficiency
the ability of a business to maximise the use of its assets in the most cost-effective way
what is the formula for the expense ratio
total expenses/sales
what does a higher/lower return on expense ratio indicate
the higher the ratio the less efficient the business is, while the lower the ratio is the more efficient the business is
what is the accounts receivable turnover ratio formula
sales/accounts receivable = answer
356/answer
what does a higher/lower accounts receivable turnover ratio indicate
the lower the ratio, the more efficient the business is with the collecting of its debts, and the higher the ratio the less efficient the business is in collecting debts
what is the acceptable turnover ratio day for a business
30 days
what is the comparative ratio analysis
the ratio analyses a business’s performance by comparing its financial ratios against a bench market
