financial ratios Flashcards
what are financial ratios ?
ratios allow comparisons to be made about a firms performance
- this might be in relation to the size of the business or in relation to the performance of its competitors in the market
ratios help place figures into context and are useful tools in helping to identify areas of concern or strength
what is the main purpose of financial accounting ?
to provide the stakeholder of a firm with information as to how the business has performed over a given period
who is interested in the financial ratios of a business ?
investors, shareholders, suppliers, customers, competitors, employees
why are investors interested in business financial ratios ?
interested in the ability of the business to repay their debts and the value of the dividends that they might receive if the business does well
why are suppliers interested in business financial ratios ?
wants reassurance that the business has the liquid funds to pay them
why are customers interested in business financial ratios ?
might be interested in how long they have to repay their bills
why are employees interested in business financial ratios ?
will look at the profitability of the business as a sign of job security and their ability to negotiate pay rises
why are competitors interested in business financial ratios ?
will be 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, industry benchmarks, published accounts
what are the categories of financial ratios ?
profitability, gearing and liquidity
what are the profitability ratios ?
return on capital employed (roce)
what are the gearing ratios ?
gearing ratio
what are the liquidity ratios ?
current ratio and acid test
