Financial ratios

Question 1

Purpose ,feature and interpretation of the following basic fiancial ratios(categories )

Answer 1

1.liquidty
2.Profiatbility
3.Stability

pur[pose feature ,interpreatation

Question 2

Definition of Financial ratios:

Answer 2

Financial ratios refer to calculations that a business undertakes to determine their financial performance and health through profitability, liquidity and stability.

calculations inorder to measure financial perfomance

Question 3

how are they used

Answer 3

Business finances are managed by** planning future income and expenses**, and by maintaining accurate records of all cash flows.

Financial performance is evaluated by** comparing **actual income and costs to the budget, and by using financial ratios to compare performance against past periods, similar businesses, and industry benchmarks.

Ratios are derived from key figures in income statements and balance sheets and should be analyzed in context, considering the entire business, past trends, and industry standards.

analyzing ratios over time can reveal important trends, such as changes in debt levels or expenses, that warrant further investigation.

Question 4

Why are they used

Answer 4

• to** indicate perfomance**
• to measure business activity
• Businesses can set performance targets to evaluate performance
• To take** corrective action **if they do not track to achieve financial targets
• To Assess the** viability** of business opportunitiies such as mergers,acquisition, jont ventures

also financial stability is the reason of using these Ratios

Question 5

Liquidity(Current Ratio)

Answer 5

Purpose /reason
1. To show the ralationship Between Assets to Liabilities .
2. Measure how many assets a business has cover its debts(Liability)
(Basically everything thats due in 12 months)

ratio=ASSETS:LIABILITIES) get the bigger side to the number 1

Question 6

sources of ratios include

Answer 6

Balance sheet
income statement

Question 7

Define financial liquidity

Answer 7

The ability of a business to cover its short-term debts or obligations

Example of liabilities are trade credit and bANK Overdraft

Liquidity is the measeure of liquid assets like cash that can be easily used .And Financial liquidity should be less than 12 months

Question 8

How to know if current ration in liquidity is any good .

Answer 8

Compare the ratio with the average in the industry which is referred to as industry benchmarking

For example, a healthy liquidity ratio for a manufacturing business in Australia might be 1.5 : 1. This means that businesses which maintain 1.5 times as many assets as liabilities are in a more liquid and healthier financial position in the manufacturing industry.

this intepretation part is important

Question 9

Assets and current Assets

Answer 9

Assets :items of financial value owned by the business
Current Assets:assets that are in a highly liquid state and could be used to pay off liabilities in the short(vice versa for the non current assests)

Question 10

Liabilities and current liabilities

Answer 10

L=Items of financial value owed by the business to others
Current Liabilities :liabilities that will be paid off in full in the short-term - within 12 months.(vise versa for the Non C L)

not relavent to syllabus

Question 10

Important aspects of financial ratio of Liquidity(Current ratio)

Answer 10

Company A has a Current Ratio of $0.80 in assets to each $1.00 of short term liabilities.

The company is only in a moderately liquid state and may need to consider:
a) **increasing their assets or b) decreasing their liabilities **

Question 11

helpful phrases for liquidity ratio (Current Ratio)

Answer 11

• The business is highly liquid.” “The business has high liquidity.” “The business is in a highly liquid state.”
  This means that the business has more than sufficient assets to cover their liabilities.
• “The business has low liquidity.” “The business is not in a liquid state.”
  This means that the business does not have sufficient assets to cover their liabilities.

Question 12

Define Profitability

Answer 12

The ability of a business tgo generate value for its shareholder through its operations .Profitabilitity is a measure of resource efficiency

Question 13

what is the purpose of Measuring profitability?

Answer 13

To indicate the earning capacity of the business Through calculating its ability to provide a return on Investment for shareholders (think of it as owners money and the ability to turn resources into profit)

Question 14

How to know if Profiatability is any good?

Answer 14

Business can compare Their gross profit ratio with that of the average in their industry,reffered to as the industry benchmark.

Question 15

Features you need to know for profitability

Answer 15

Question 28

Define financial Stability

Answer 28

The Extent to which a business relies on borrowed capital to fund its operations

Purpose is to measure the extent in which a business relies on external borrowings to fund its operations

Question 29

Ratio used to measure stability

Answer 29

Debt to equity ratio

Question 30

Define debt fainanciang

Answer 30

Getting financail help from financial institutions .

1.The benefit of it is that ownership of the company does not change
2.Interest paid is also tax deductible for the company while equity is nog .

Limitiataitions =, money has o be piad back in fulll whether a s business has made a loss

Question 30

Debt to equity reffered name

Answer 30

The business Gearing
1. High gearing =
a company is relying more heavily on debt to finance its operations (less stable, more risky)

2.**Low gearing **=
a company is relying more heavily on owner’s equity to finance its operations (more stable, more conservative position)