financial ratios. Flashcards
who are the users of ratios?
investors and shareholders
suppliers
customers
competition
employees
why are investors interested in ratios?
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
why are suppliers interested in ratio?
they want reassurance that the business has the liquid funds to pay them
current ratio
acid test ratio
why are customers interested in ratios?
might be interested in how long they have to repay their bills
debtor days
why are employees interested in ratios?
they will look at the profitability of the business as a sign of job security and their ability to negotiate pay rises
ROCE ratio.
why are competitors interested in ratios?
seeking to benchmark their performance against yours to see if they are becoming stronger or weaker in the market.
what are the sources of information for ratios?
past financial performance.
economic environment
published accounts
industry benchmarks
formulae for shareholders’ funds?
Share capital + reserves
formulae for Total Equity?
Share capital + reserves.
formulae for capital employed?
Shareholders’ Funds +Long-term Liabilities.
formulae for working capital?
Current Assets- Current Liabilities
what is profitability ratio?
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.
what could a low profitability ratio do?
harm the confidence in the current management and might result in a falling share value which makes the company vulnerable to takeover.
formulae for profitability?
Net profit before tax /
Shareholders’ funds (equity) +Long-term liabilities
x100
what is gearing?
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.
what is classes as a low gearing ratio?
less than 30%
what is a high gearing ratio?
more than 50%
what is the formulae for gearing ratio?
long-term liabilities /
capital employed x100
what are reasons for debt finance?
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
what does a low gearing value suggest?
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.
eval of shareholder capital?
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
