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Business Management > Financial Ratios Business Management Slide 14 > Flashcards

Financial Ratios Business Management Slide 14 Flashcards

1
Q

Name the types of financial ratio analysis

A

1.Liquidity ratios
2.Financial ratios
3.Profitability ratios
4.Activity / Efficiency ratios

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2
Q

What does a liquidity ratio indicate

A

a firms ability to cover its short term obligations
Eg: pay bills for coming year , cover short term debt

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3
Q

What is a financial ratio concerned about

A

the relationship between debt and equity and the stability of the business in the longer term.

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4
Q

Name the financial ratio that is an indicator of how highly borrowed a business is

A

Financial ratios

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5
Q

What is the profitability ratio an indicator of

A

the firms efficiency of operation

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6
Q

How does profitability ratio indicate the firms efficiency of operation

A

Relate profit to sales
Relate Profit to the amount of capital invested in the business

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7
Q

What does activity/efficiency ratio indicate

A

how efficiently the business is managing its working capital.

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8
Q

What is the current ratio formula

A

Current assets
———————
Current liabilities

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9
Q

Name the types of liquidity ratios

A

Current ratio
Quick ratio (acid test ratio)

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10
Q

What does a current liquidity ratio measure

A

the capacity of a business to pay cash when its bills fall due

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11
Q

What is an ideal current liquidity ratio.

A

2:1
But many business managers on a ratio of 1.5:1 or lower

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12
Q

What is the quick ratio(acid test ratio) formula

A

Current assets - stocks
———————————
Current liabilities

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13
Q

What does quick liquidity ratio measure

A

current assets e.g. cash, savings, debtors that can be quickly converted into cash relative to liabilities

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14
Q

What is an ideal quick liquidity ratio

A

1:1 or greater

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15
Q

What type of ratio is debt/equity %

A

Financial ratio

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16
Q

What is the formula for debt/equity%

A

Long term debt
———————- X100
Owners equity

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17
Q

What does debt/equity % measure

A

the longer term financial stability
Describes the relative proportions of long term debt and owners equity used to fund a business.

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18
Q

What is considered a high debt/equity%

A

Levels of 50 to 60%

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19
Q

What is the concept of debt/equity%

A

Financial risk increase as debt/equity increases but financial problems only follow when cash flow is insufficient to meet interest and repayments

20
Q

What type of ratio in interest cover ratio

A

Financial ratio

21
Q

What is the formula for interest cover ratio

A

PBIT
————
Annual interest

22
Q

What does interest cover ratio indicate

A

How many times the interest payable is covered by the profit
Of particular interest to lenders i.e. how vulnerable are the interest repayments to a fall in business profits

23
Q

What is an ideal interest cover ratio

A

A ratio of 4 or higher

24
Q

What type of ratio is gross profit to sales%

A

Profitability ratio

25
Q

What is the formula for gross profit to sales%

A

Gross profit
—————— X100
Sales

26
Q

What does gross profit to sales % measure

A

The margin available to cover expenses and profit I.e what is left from sales to cover admin,selling , depreciation etc as well as taxes and provide a profit for owners/shareholders

27
Q

What type of ratio is net profit to sales %

A

Profitability ratio

28
Q

What is the formula for net profit to sales%

A

Net profit after tax
————————— X100
Sales

29
Q

What does net profit to sales % measure

A

•The margin left for distribution to the shareholders/owners and for retention for reinvestment in the business
•i.e. how much of every €1 of sales is left and available to pay shareholders or re invest in the business

30
Q

What type of ratio is return on equity %(ROE)

A

Profitability ratio

31
Q

What is the formula for return on equity % (ROE)

A

Net profit after tax
—————————
Equity

32
Q

What does return on equity % measure

A

performance from the point of view of the shareholders

33
Q

What type of ratio is stock days

A

Activity / efficiency ratio

34
Q

What is the formula for stock days

A

Average stock x 365
—————————-
Sales (or COS)

35
Q

What does stock days measure

A

The number of days that stocks are held in the business
Denominator can be either sales or cost of sales but important that you are consistent in order to compare over time

36
Q

What type of ratio is inventory(stock) turnover

A

Activity/Efficiency ratio

37
Q

What is the formula for inventory (stock) turnover

A

COS
———
Average stock

38
Q

What does inventory (stock) turnover measure

A

The average number of times the stock is turned over
Indicates how good the business is at turning stock into sales revenue

39
Q

What type of ratio is debtor days

A

Activity / Efficiency ratio

40
Q

What is the formula for debtors days

A

Trade debtors x 365
——————————
Sales

41
Q

What does debtors days measure

A

The time taken to receive payment from credit customers (i.e. your debtors)
Also indicates the amount of “credit given”

42
Q

What type of ratio is creditor days

A

Activity / Efficiency ratio

43
Q

What is the formula for creditor days

A

Trade creditors x 365
——————————
Cost of sales (or purchases)

44
Q

What does creditor days ratio measure

A

The time taken to pay suppliers
Also measures the average number of days credit that the business receives

45
Q

What ratios should be consistent over time with the denominator for comparison over time (can be sales or COS)

A

Stock Days
Creditor Days

Business Management (7 decks)

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