INTRO TO RATIO ANALYSIS Flashcards
What is ratio analysis
Ratio analysis: Examining accounting information by making calculations with the collected date allowing for judgements to be made about a firm’s performance.
What are current assets
Current assets = Things that are going to be turnt into cash within 12 months
What are current liabilities
Current liabilities = Costs that the business will have to pay within 12 months
Look over busines A and B
https://docs.google.com/document/d/1PUAb34hJPeWqdmalMebDum4Lgopkc9cqvPTUsC22w7I/edit
What are profitability ratios
These measure how effectively a firm turns revenue into profit
What is a liquidity ratio
These meausre the ability of a firm to meet its short term debts and give an indication of the likelihood of thr firm surviving the next year
What are efficiency ratios
These meausre how efficiently a firm is at managing their assets
What is gearing
This ratio examines how reliant a business is on borrowed money (like bank loans) and indicate a business’s prospects of lonf term survival
Why does managment use ratio analysis
Part of SWOT analysis - identify strengths and weaknesses of organisational and incorporate to strategic planning - In terms of finance
Why do employees use ratio analysis
Assess job security and justification for wage demands
Why do customers use ratio analysis
Assess long term survival prospects of a business will guarantees be honoured? - For example you buy a rolex and get a 5 year guarantee on it for scratches etc but if rolex goes into liquidity before the 5 years are up, then the customer would have had the contract broken, and the guarantee would be useless.
Why do suppliers use ratio analysis
Assess the extent to which the business should be offered favourable credit terms.
Why do shareholders use ratio analysis
Assess the effectiveness of management team/ compared to other potential investments
What is intra firm comparison
Looks at the performance of different opereations within the same firm
Maybe comparing branches, product lines, profit centeres or geographical areas
Can help to set targets
Can compare current performance to historical performance
What is inter firm comparison
Compares the performance of one firm to another
Helps investors choose wheather or not to invest
Can help set tergets
Allows for benchmarking against best performing firms
What is the definition of intra firm comparison
Intra firm comparison = Comparing a firm with itself - For example comparing branches with each other, or products with each other
What is the definition of inter firm comparison
Inter firm comparison = Comparing the organisation to another organisation - It doesn’t have to be in the same industry
What are the strenghts of using financial data to jedge performance
Allows for bother inter and intra firm performance to be assessed
Plc accounts are audited and should be accurate
Regulations mean that the layout of the accounts should be consistent between firms, therefore they are easier to use
Provides large amoutns of quantative date for analysis
What are the weaknesses of using financial data to judge performance
Does not consider qualitative data, such as the motivation of a firm;s workforce
It is difficult to accurately account for some intangible assets like the value of a brand;s image
There is potential for accounts to be manipulated - window dressing
