financial ratios -

Question 1

what does liquidity refer to

Answer 1

a business’s ability to meet its short-term financial goals/commitments (less than 12 months)

Question 2

what ratio is used to measure liquidity

Answer 2

current ratio

Question 3

what is the current ratio

Answer 3

current assets/current liabilities

Question 4

assess what a high current ratio means and a low ratio

Answer 4

the higher the ratio the more liquid the business is. while a lower ratio indicates the business is less liquid

Question 5

what is the acceptable ratio of the liquidity(current ratio)

Answer 5

2:1

Question 6

what does too high ratio mean

Answer 6

it means the business is under utilising their current assets effectively

Question 7

what does solvency refer to

Answer 7

refers to the ability of a business to meet its long-term financial goals/commitments

Question 8

what is the ratio used to measure solvency

Answer 8

debt to equity ratio

Question 9

what is the debt-to-equity ratio

Answer 9

total liabilities/total equity

Question 10

evaluate what the ends of the ratio (i.e. higher and lower) means for the business

Answer 10

the lower the ratio the less geared the business is. The higher the ratio the more highly geared the business is.

Question 11

what is the acceptable ratio for solvency(debt to equity ratio)

Answer 11

1:1.5

Question 12

what does profitability refer to

Answer 12

the ability of a business to maximise its profits

Question 13

what are the ratios for profitability

Answer 13

gross profit ratio, net profit ratio and return on equity ratio

Question 14

what is the formula for the Gross profit ratio

Answer 14

gross profit/sales

Question 15

what does a higher/lower gross profit ratio indicate

Answer 15

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

Question 16

what is the formula for net profit ratio

Answer 16

net profit/sales

Question 17

what does a higher/lower net profit ratio indicate

Answer 17

the higher the ratio that more profitable the business is, and the lower the ratio the less profitable the business is

Question 18

what is the general ratio % that indicates a sound financial position for profitability

Answer 18

10%

Question 19

what is the formula for return on equality ratio

Answer 19

net profit/total equity

Question 20

what does the return on equity ratio measure

Answer 20

how effective the funds contributed by the owners have been at generating profit - essentially the return on their investment

Question 21

what does a higher/lower return on equity ratio indicate

Answer 21

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

Question 22

what is the acceptable ratio % of return on equity ratio

Answer 22

10%

Question 23

what are the ratios for efficiency

Answer 23

expense ratio and accounts receivable turnover ratio

Question 24

what is efficiency

Answer 24

the ability of a business to maximise the use of its assets in the most cost-effective way

Question 25

what is the formula for the expense ratio

Answer 25

total expenses/sales

Question 26

what does a higher/lower return on expense ratio indicate

Answer 26

the higher the ratio the less efficient the business is, while the lower the ratio is the more efficient the business is

Question 27

what is the accounts receivable turnover ratio formula

Answer 27

sales/accounts receivable = answer
356/answer

Question 28

what does a higher/lower accounts receivable turnover ratio indicate

Answer 28

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

Question 29

what is the acceptable turnover ratio day for a business

Answer 29

30 days

Question 30

what is the comparative ratio analysis

Answer 30

the ratio analyses a business’s performance by comparing its financial ratios against a bench market