Financial Ratios

Question 1

Current ratio formula

Answer 1

CA/CL

Question 2

What does current ratio mean?

Answer 2

The extent to which a business can pay their bills when they fall due

Question 3

Acid test formula

Answer 3

CA-Stock/CL

Question 4

What does acid test mean?

Answer 4

The extent to which a business can pay its bills when they fall due without using stock as it takes time to convert stock to cash

Question 5

Gearing formula

Answer 5

LTL/CE x 100

Question 6

What is a good level of gearing?

Answer 6

Below 50%

Question 7

What does gearing mean?

Answer 7

The extent to which a business relies on loans

Question 8

Gross Profit Margin formula

Answer 8

GP/Rev x 100

Question 9

Net Profit Margin formula

Answer 9

OP/Rev x 100

Question 10

ROCE formula

Answer 10

OP/CE x 100

Question 11

What is a good ROCE?

Answer 11

20%-30%

Question 12

Creditor days formula

Answer 12

payables/cost of sales x 365

Question 13

What does creditor days mean?

Answer 13

How many days it takes to pay suppliers

Question 14

Debtor days formula

Answer 14

recievables/revenue x 365

Question 15

What does debtor days mean?

Answer 15

How many days it takes to get paid

Question 16

Inventory turnover formula

Answer 16

cost of sales/average stock held

Question 17

What does inventory turnover mean?

Answer 17

How many times all the stock is sold

Question 18

Debt to Equity formula

Answer 18

LTL/Equity x 100

Question 19

What does debt to equity mean?

Answer 19

Compares loands with retained profit and shareholder funds

Question 20

Asset turnover formula

Answer 20

Rev/NCA

Question 21

What does asset turnover mean?

Answer 21

How much revenue for every £1 worth of non current assets

Question 22

Return on Equity formula?

Answer 22

profit for the year/shareholder’s equity x 100

Question 23

What does ROE mean?

Answer 23

how much profit for every £1 of shareholders funds