Financial Ratios

Question 1

Why do businesses use ratio analysis ?

Answer 1

Businesses use ratio analysis in order to help measure their profitability , liquidity and efficiency

Question 2

What are 4 profitability ratios ?

Answer 2

-gross profit margin
-mark up
-net profit margin
-return on capital employed (ROCE)

Question 3

What are the 2 liquidity ratios ?

Answer 3

-current ratio
-liquid capital ratio

Question 4

What is meant by measuring liquidity ?

Answer 4

Measuring liquidity - liquidity ratios measure how solvent a business is , are they able to meet short term debts

Question 5

What is meant by measuring efficiency ?

Answer 5

Measuring efficiency - efficiency ratios are used to assess how well management is controlling key aspects of the business , primarily stock and finances

Question 6

What are 3 efficiency ratios ?

Answer 6

-trade receivable days
-trade payable days
-inventory turnover

Question 7

What are the limitations of using ratios to assess a businesses performance ?

Answer 7

-calculated on past data , therefore may not give a true reflection
-financial records may be manipulated and therefore the ratios are based on inaccurate date
-ratios don’t consider qualitative factors
- a ratio may indicate a problem in the business but doesn’t directly identity the cause or give a solution
-inter-firm comparisons can be difficult as not all businesses report their performance in the same way