Financial Ratios

Question 1

What are financial ratios

Answer 1

Express relationships between finical accounts and between expected relationships from one point in time to another

Question 2

Classification of financial ratios

Answer 2

Profitability, liquidity, solvency, investment

Question 3

Profitability

Answer 3

Ability to earn a profit from delivering goods and services

Question 4

Liquidity

Answer 4

Ability to meet short term obligations

Question 5

Solvency

Answer 5

ability to meet long term obligatos

Question 6

Investment

Answer 6

The ability to provide return on investment for shareholders

Question 7

Percentage change equation

Answer 7

(new value- old value) / old value x100

Question 8

What are profitability ratios

Answer 8

Equity investors are concerned with the firms ability to generate sustain and increase profit

Question 9

How are profitability ratios measured

Answer 9

Relationship between profit and sales

Relationships between profit and investment required got generator them

Question 10

Return on equity

Answer 10

Net profit/ Equity x 100

Question 11

What is return on equity

Answer 11

How much profit a company generates with the money the shareholders have invested

Question 12

Return on capital employed

Answer 12

Operating profit / (equity + non-current liabilities)

Question 13

What is return on capital employed

Answer 13

Relationship between operating profit and long term capital invested in the business

Question 14

gross profit margin

Answer 14

Gross profit/ sales revenue x100

Question 15

What is gross profit margin

Answer 15

How much is left as gross profit after deducting the cost of sales

Question 16

Operating profit margin

Answer 16

Operating profit/ sales revenue x 100

Question 17

What is operating profit

Answer 17

How much is left as operating profit after deducting cost of sales and operating costs

Question 18

Net profit margin

Answer 18

Net profit/ sales revenue x100

Question 19

What is net profit margin

Answer 19

How much is left as net profit after deducting all costs and taxation

Question 20

Inventories turnover period

Answer 20

Inventories/ cost of sales x 365

Question 21

What is inventories turnover period

Answer 21

measures the average period inventories are being held (better if shorter)

Question 22

Settlement period for receivables

Answer 22

trade receivables/ credit sales revenue x 365

Question 23

What is settlement period for receivables

Answer 23

How long on average customers take to pay back the amounts they owe (shorter better as less money tied up)

Question 24

settlement for payables

Answer 24

Trade payables/ credit payables x 365

Question 25

What is settlement period for payables

Answer 25

How long on average businesses take to pay those on credit

Question 26

Sales revenue to capital employed

Answer 26

sales revenue/ (Equity + non-current liabilities)

Question 27

What is sales revenue to capital employed

Answer 27

Net asset turnover. Examines how capital employed (net assets) are being used to generate sales (higher prefered as more sales revenue for each £1 of capital employed)

Question 28

Sales revenue per employee

Answer 28

Sales revenue/ number of emploees

Question 29

What is sales revenue per employee

Answer 29

measure of workplace productivity, high value implies productive development of staff

Question 30

Current ratio

Answer 30

Current assets/ current liabilities

Question 31

What is current ratio

Answer 31

Compares liquid assets with current liabilities. Higher means more liquid which is preferable as it can cover the liabilities.

Question 32

Quick ratio (acid test)

Answer 32

(Current assets - inventories) / Current liabilities

Question 33

What is quick ratio (acid test)

Answer 33

Many businesses cannot convert inventories as fast, may suggest that a business is not as liquid as they thought.

Question 34

Gearing ratio

Answer 34

Non current liabilities / (equity + non-current liabilities) x 100

Question 35

What is gearing ratio

Answer 35

Financial leverage - measures contribution of long term lenders to long term capital structure.

Question 36

Interest cover ratio

Answer 36

Profit before interest and tax/ Interest (finance cost)

Question 37

What is interest cover ratio

Answer 37

Measures the amount of operating profit available to cover interest payable. Lower suggests increased risk to lenders that interest payments will not be met

Question 38

Dividend payout ratio

Answer 38

Dividends announced for year/ earnings available for the year for dividends x 100

Question 39

What is dividend payout ratio

Answer 39

Proportions of earnings paid to shareholders in the form of dividends

Question 40

Dividend cover ratio

Answer 40

Net profit/ Dividend announced for year

Question 41

What is Dividend cover ratio

Answer 41

How many times the earnings available for dividend, covers the actual dividend paid

Question 42

Earnings per share

Answer 42

Net profit/ number of ordinary share

Question 43

Dividend yield ratio

Answer 43

Dividend per share/ market value per share x 100

Question 44

What is dividend yield ratio

Answer 44

cash return from a share to its current market value

Question 45

Price earning ratio

Answer 45

Market value per share/ earnings per share

Question 46

What is price earning ratio

Answer 46

A measure of market confidence in the future of a business. Higher means a greater confidence in the future earning power of the business