financial ratios.

Question 1

who are the users of ratios?

Answer 1

investors and shareholders
suppliers
customers
competition
employees

Question 2

why are investors interested in ratios?

Answer 2

to see the ability of the business to repay their debts and the value of the dividends that they might receive if the business does well.
gearing ratio
shareholder ratio

Question 3

why are suppliers interested in ratio?

Answer 3

they want reassurance that the business has the liquid funds to pay them
current ratio
acid test ratio

Question 4

why are customers interested in ratios?

Answer 4

might be interested in how long they have to repay their bills
debtor days

Question 5

why are employees interested in ratios?

Answer 5

they will look at the profitability of the business as a sign of job security and their ability to negotiate pay rises
ROCE ratio.

Question 6

why are competitors interested in ratios?

Answer 6

seeking to benchmark their performance against yours to see if they are becoming stronger or weaker in the market.

Question 7

what are the sources of information for ratios?

Answer 7

past financial performance.
economic environment
published accounts
industry benchmarks

Question 8

formulae for shareholders’ funds?

Answer 8

Share capital + reserves

Question 9

formulae for Total Equity?

Answer 9

Share capital + reserves.

Question 10

formulae for capital employed?

Answer 10

Shareholders’ Funds +Long-term Liabilities.

Question 11

formulae for working capital?

Answer 11

Current Assets- Current Liabilities

Question 12

what is profitability ratio?

Answer 12

the amount of profit made by a firm in relation to the capital that has been invested.
all stakeholders will be interested in this value as it is a fundamental measure of business success.

Question 13

what could a low profitability ratio do?

Answer 13

harm the confidence in the current management and might result in a falling share value which makes the company vulnerable to takeover.

Question 14

formulae for profitability?

Answer 14

Net profit before tax /
Shareholders’ funds (equity) +Long-term liabilities
x100

Question 15

what is gearing?

Answer 15

a measure of a firm’s total capital that has been financed through long-term borrowing (debt finance).
if a firm is highly geared then they have borrowed heavily which makes the vulnerable to a rise in interest rates.

Question 16

what is classes as a low gearing ratio?

Answer 16

less than 30%

Question 17

what is a high gearing ratio?

Answer 17

more than 50%

Question 18

what is the formulae for gearing ratio?

Answer 18

long-term liabilities /
capital employed x100

Question 19

what are reasons for debt finance?

Answer 19

low interest rates - borrowing is attractive
the owners do not want to lose control through share issues
the business already has a low gearing ratio
bank loans are quicker to acquire than share capital, to exploit opportunities

Question 20

what does a low gearing value suggest?

Answer 20

the capital to support the business has come from sources other than loans, most likely is shareholder capital. this makes shareholders a key stakeholder in the business and this can influence the corporate objectives.

Question 21

eval of shareholder capital?

Answer 21

no interest repayments
provides a means of borrowing from banks and other lenders if needed as they hold very little debt and so carry low risk
reluctant to invest and avoid risk- low gearing