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Business Studies - Finance > Financial Ratios > Flashcards

Financial Ratios Flashcards

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1
Q

What are non-current assets?

A
  • Value of the assets that the business has purchased and expects to keep in the business for more than one year.
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2
Q

What are current assets?

A
  • The assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.

Examples include:

  • Cash balances
  • Trade debtors (receivables)
  • Stock
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3
Q

What are current liabilities?

A
  • Amounts owed by the business that need to be paid within the next 12 months.
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4
Q

What are non-current liabilities?

A

Liabilities that are not due to be paid in the next 12 months but still need to be reflected in the balance sheet.

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5
Q

What is ratio analysis?

A
  • The comparison of financial data to gain insights into business performance.
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6
Q

Who are the key users of profitability ratios? Give at least two examples.

A

At least two from:

  • Shareholders
  • Government
  • Competitors
  • Employees
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7
Q

Who are the key users of liquidity ratios?

A
  • Lenders
  • Suppliers
  • Shareholders
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8
Q

Who are they key users of financial efficiency ratios?

A
  • Shareholders
  • Lenders
  • Competitors
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9
Q

What do profitability ratios do?

A
  • Assess the returns earned by a business from its trading activities and investments.
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10
Q

What does return on capital employed (ROCE) measure?

A
  • Whether or not the business is making a satisfactory level of profit.
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11
Q

With regards to the ROCE percentage, what percentage is better?

A
  • The higher the percentage the better.
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12
Q

With regards to operating profit, what percentage is better?

A
  • The higher the percentage the better.
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13
Q

With regards to gross profit, what percentage is better?

A
  • The higher the percentage the better.
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14
Q

What is the equation for current ratio?

A

Current assets/current liabilities

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15
Q

What is the purpose of the current ratio?

A
  • To see if the business has enough liquidity - ability to pay its debts - in the short term (within a year).
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16
Q

What is the purpose of the acid test?

A
  • To see if the business has enough liquidity to pay its debts in the short term. WITHOUT INCLUDING STOCK.
17
Q

What is an ideal current ratio figure?

A

Above 1 - this means that the business has more current assets than it does current liabilities.

18
Q

What is an ideal acid test ratio?

A

Above 1 - this means that the business has more current assets than it does current liabilities.

19
Q

What is the purpose of gearing?

A

To see how reliant the business is on loans.

20
Q

With regards to gearing, what percentage is best?

A

The lower the percentage, the better.

21
Q

What is payables days?

A

How much time it takes the business to pay its debts.

22
Q

What is receivables days, and should it be smaller or bigger than payables days?

A

How much time it takes the business to be paid by customers.

Smaller than payables days

23
Q

What does inventory turnover refer to?

A

How many times a year a business is able to sell its stock.

24
Q

Complete the sentence

The h__________ the inventory turnover, the ______ the business is at managing its stock.

A
  • Higher

- Better

25
Q

In what ways is ROCE useful?

Give at least one example.

A

At least one from:

  • Useful to evaluate overall business performance.
  • Useful to provide a target for individual projects.
  • Useful to provide a benchmark against competitors.
26
Q

How is return on capital employed calculated?

A

OPERATING PROFIT / TOTAL EQUITY + NON CURRENT LIABILITIES X100

27
Q

How can ROCE be evaluated?

Give at least two examples.

A

At least two from:

  • It is relatively easy to calculate and compare information between businesses and their competitors.
  • Percentage figures will differ between industries.
  • The data used is only a snapshot of business performance at a particular time.
28
Q

How can current ratio be evaluated?

Give at least two examples.

A

At least two from:

  • A ratio of above one means that the business has more current assets than it does current liabilities - efficient management of of working capital.
  • A low ratio (well below 1) could suggest potential liquidity problems.
  • Really high ratio could suggest that the business has too much working capital tied up in stock.
29
Q

What is the acid test ratio formula?

A

Current assets (excluding inventories) / Current liabilities

30
Q

How can the acid test ratio be evaluated?

A
  • Less relevant for businesses with high stock turnover.
31
Q

How is inventory turnover calculated?

A

Cost of goods sold / average inventories held

32
Q

What might a fall in inventory turnover suggest?

A
  • A build up of slow moving stocks.
33
Q

Give at least three examples of the limitations of ratio analysis.

A

At least three from:

  • one set of data is not enough.
  • financial data used is from the past.
  • the information might not be entirely reliable because it is possible for financial data to be manipulated.
34
Q

Why might it be okay to have high gearing at the moment?

A
  • Low interest rates mean that borrowing is cheap, meaning that it could potentially be the best option for it.
35
Q

How is gearing calculated?

A

Long term liabilities / capital employed

36
Q

What is the downside of selling shares to raise money?

A
  • More profit is being given away to the shareholders through a dividend.

Business Studies - Finance (8 decks)

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