HSC Financial Ratios Flashcards
Current ratio is an analysis of which aspect of the financial statement?
Liquidity
Debt equity ratio is an analysis of which aspect of the financial statement?
Gearing/solvency
Gross profit ratio is an analysis of that aspect of the financial statement?
Profitability
Net ratio is an analysis of which aspect of the financial statement
Profitability
Return on equity ratio is an analysis of which aspect of the financial statement?
Profitability
Expense ratio is an analysis of that aspect of the financial statement?
Efficiency
Accounts Receivable turnover ratio is an analysis of which aspect of the financial statement?
Efficiency
What is the current ratio formula?
Current assets/current liabilities
What is the debt-to-equity ratio?
Total liabilities/owners’ equity
What is the gross profit ratio?
Gross profit/sales
What is the net profit ratio?
Net profit/sales
Note net profit is gross profit less expenses
What is the return on equity ratio?
Net profit/total equity
What is the expense ratio?
Total expenses/sales
What is the Accounts Receivable turnover ratio?
Sales/Accounts Receivable
What does analysis of the current ratio show about a business?
Short term financial stability of the business.
Is generally accepted that a ratio of 2:1 indicates a sound financial position
What does analysis of the debt-to-equity ratio show about a business?
Shows the extent to which the firm is relying on deck outside sources to finance the business
The higher the ratio, the less solvent the firm
What does analysis of the gross profit ratio show about a business?
Shows that changes from one accounting period to another and indicates effectiveness of planning policies concerning pricing, sales, discounts, evaluation of stuff etc
The higher the ratio the better
What does the analysis of the net profit ratio show about a business?
Net profit ratio represents a profit or return to the owners. Family aiming for a high net profit ratio. A low net profit ratio indicates expenses should be examined to look for possible reductions
What does analysis of the return on equity ratio show about a business
Shows how effective the funds contributed by the owners have been generating profit and so the return on investment. The higher the ratio or percentage, the better the return to the owner.
What does an analysis of the expense ratio show about a business?
Each of the categories of expenses compared with sales. The ratio indicates amount of sales that are allocated to individual expenses such as selling, administration calls and financial expenses. Expense ratios need to be kept at a reasonable level. Higher expense ratios may be the result of poor management.
What does an analysis of the accounts receivable ratio show about a business?
Measures the effectiveness of a firm’s credit policy and how efficiently it collect its debt. High turnover rates indicate the business has efficient debt collection.
