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Year 1 - Accounting and Finance > lec 7 - ratios > Flashcards

lec 7 - ratios Flashcards

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1
Q

what do financial ratios provide/ are useful fo r

A

meaningful comparison between entities e,g which is more profitable

can compare finacnail psoition of firm over time

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2
Q

what are the 3 things ratios can measure

A

profitability
liquidity

solvency

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3
Q

ROCE

A

PBIT/NET CAPITAL EMPLOYED

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4
Q

How do we calculate net capital employed

A

equity + NCL

Total assets - current liabilties

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5
Q

what does ROCE shjow us

A

for every £1 of capital employed how much profit company generates

efficiency of comp in utilising capital to generate profit

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6
Q

the higher the ROCE the

A

better

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7
Q

gross profit margin

A

gross profit (rev-csot of sales)
/
revenue

x 100

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8
Q

whats bad about gross profit amrgin

A

doesnt take into account any other costs but the costs of production

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9
Q

differnce between margin and and mark up

A

mark up - profit is measured as a % of costs

margin - profit is measured as a % of revenue

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10
Q

gross profit mark up

A

gross profit
/
cost of sales / TC(dEPENDS ON COMPANY POLICY)

  • 100
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11
Q

OPERATING profit margin

A

operating profit/

revenue

x100

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12
Q

how do we work out operating profit

A

gross profit - (selling and distribution costs + aadmin costs)

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13
Q

what does operating profit margin show

A

how much operating profit earned for every £1 of sales

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14
Q

we can compare gross profit marign to operating profit margin to see

A

how much revenue is lost to expenses

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15
Q

net profit maegin

A

net profit/revenue x 100

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16
Q

net profit margin shows

A

% of sales that is neet profit

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17
Q

net profit

A

Operating profit - finance - tax

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18
Q

how can we compare the net profit to the operating profit - as in what does the commparison show us

A

how much rev is lost to expenses including interst

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19
Q

if we need to calcaulte ROCE but no finance costs (as dont ake out debt ) and they say ignore tax waht profit figure do we use

A

net profit

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20
Q

liquidity

A

ability to generate cash and satisfy st liablities - without which business willl fail

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21
Q

company has a what to satisfy ST Liabilities

A

obligation

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22
Q

working capital equation

A

CA - CL

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23
Q

CA - CL why is this relevant to liquidity

A

copmany can only really use CA to pay em off
as fast for company to convert CA into Cash

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24
Q

Current Ratio

A

CA/CL

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25
Q

What does current ratio show us

A

extent to which CL are covered by CA

26
Q

Why dont we want the current ratio too high

A

indicate company not spenidn gmoney properly and it being too conservative

26
Q

conventionally what do we want our CA to be i.e the satisfactory level

A

2:1

26
Q

acid test ratio

A

current assets - inventory/ current liabilities

27
Q

in acid test ratio why do we takeaway teh inventories

A

aren’t as liquid as other current assets

hard for firm to turn all of inventory into cash

28
Q

why is it hard for the firm to turn inventory into cash

A

firm dont decide whether or not they can sell its the mkt demand that determines this

if sel stock all now got to
heavily discount - so wont get the full value

29
Q

measures of working capital manangemnt

A

payables days

recievables days

inventory days

30
Q

recievables days

A

how long takes to recieve payment from creditors

31
Q

payables days

A

how long it takes to pay credit suppliers

32
Q

what is inventory days

A

how long stock is held before it is sold

33
Q

the faster which days the better

A

recievbles

34
Q

what do we want to be higher in than the other ttype in term - P or R

A

P as we wannt more time to pay it off

35
Q

why is a high payables day good

A

interest free credit

36
Q

why do wwe want a high payables day but not too much as

A

want high - retain cash and I elsewehere rather than payback interst free borrowing

not oo much
affect company credit - mroe problems in the future
supplier might stop supplying
suggest dinancial weakness

37
Q

receivables days

A

receivables/revenue x 365 RR 365

38
Q

we want recievables back quick but waht is the good thing id company extends credit period

A

increase revenue as more people will be open

39
Q

payables dyas

A

PAYABLES /PURCHASES x 365

40
Q

inventory days

A

inventory/cost of sales x 365

41
Q

measures of solvency

A

gearing ratio

leverage ratio

42
Q

what is solvency

A

ability to service and repay long term liablities

i.e make interest payments and pay off full amount

43
Q

what are the two main sources of financing opration/projoects

A

equity

debt

44
Q

equity is

A

issuing share and sellinghtem to stkh

45
Q

debt is

A

corporate bonds , bank loans etc

46
Q

why is equity less riskier than debt

A

debt - got financial obligatio ot make paymentsd

where as with equity no obligation to make a return or payback sh

repaymnet i s abig burden

47
Q

what do teh solvency ratios tell us

A

% of debt company has

48
Q

leverage/ debt to qeuity ratio

A

long term debt/equity x 100

49
Q

the leverage ratio is relative to

A

equity

50
Q

the gearing ratio is relative to

A

the whole source of finance

51
Q

gearing ratio

A

long term debt/long term debt + equity x 100

52
Q

if company got 20% equity how much debt do they have

A

80%

53
Q

the higher the debt

A

the higher the risk of solvency

54
Q

if you invest in a highly geared company in a good econ environwmnt what is likel

A

get lots of money back and vise versa

55
Q

if we wanna check if a firm can afford its deb s what do we check

A

interest cover ratoi

56
Q

what is the interest cover ratio

A

indicates companies ablity to service it’s borrowing

57
Q

interest cover ratio formula

A

profit before interest /interest expense

58
Q

how can a modification of interest cover be obtained

A

replacing earnings with cash flows from operations

59
Q

profit before interest aka

A

operating profit

Year 1 - Accounting and Finance (49 decks)

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