numerical LOAs Flashcards
high ROCE
-business has high ROCE
-business making efficient use of capital to generate profit
-high profitability
-higher return on investment for shareholders
-increase in dividends
-more attractive to shareholders
-higher share price
-able to raise more capital through selling shares in future
low ROC
-business has low ROCE
-not making efficient use of capital to generate profit
-low profitability
-lower return on investment for shareholders
-may be unable to pay high dividends
-less attractive to shareholders
-unable to raise much capital through selling shares in future
high gearing
-high amount of capital financed through debt
-increased cash outflows for loan capital repayments
-and interest repayments
-reducing cash reserves
-reduced current assets
-low current ratio
-poor liquidity
-difficulty making current liabilities when due
high gearing - taking opportunities
-high amount of capital financed through debt
-increased capital within business
-opportunity to invest int increasing scale e.g machinery
-opportunity to achieve tech EOS
-improve productivity and output
-FC spread more
-lower unit FC
low gearing
-lower amount of capital finaced through debt
-reduced outflows for loan capital repayments
-less interest to be paid
-ensuring no additional strain on cash reserves
-increased current assets
-high current ration
-good liquidity
-able to meet current liabilities when due
-no risk of having to sell NCA
low gearing - missed opportunity
-low amount of capital financed through debt
-reduced capital within business
-missed opportunity to borrow capital that could be used to invest into increasing scale
-better opportunity to capitalise on increased demand
-increased sales revenue
-help business increase market share
high liquidity - benefit
-high liquidity (current ratio above 1.5, acid test above 1)
-high amount of cash reserves
-keep up with payments to suppliers
-wont have to sell NCA to keep up with day to day bills
-likely to have uninterrupted business operations
-reduced risk of failure
low liquidity - drawback
-low liquidity (current ratio below 1, acid test below 0.75)
-low levels of cash reserves
-struggle to pay suppliers
-may be forced to sell NCA to pay day to day bills
-may lead to disruption to business operations
-leading to high risk of failure
moving averages - sales increasing
-moving average shows sales are increasing
-include evidence
-business should reinvest in increasing capacity
-in order to keep up with rising demand
-increase sales vol
-purchasing EOS LOA
moving averages - sales falling
-moving average shows sales falling
-include evidence
-business should attempt to diversify their portfolio
-and invest in different product
-in order to spread risk if sales continue to fall
-enabling them to maintain high revenue
-keeping high profit margin
moving averages - seasonal
-business has higher sales in specific quarters
-include evidence
-business is likely to be seasonal
-meaning they receive high cash inflows only at certain times of year
-may have negative net cashflow in other months
-giving them low cash reserves
-poor liquidity
quick payback
-investment pays off initial cost relatively quickly
-if loan was used for initial investment
-loan period will be shorter
-reducing interest payments
-lower outflows
-improved liquidity
-able to reinvest into other projects
long payback
-investment pays off initial cost slowly
-business will need to wait longer to recover their investment
-reduced cash reserves as cash is tied up in investment
-reducing current assets
-poor liquidity
-may be unable to pay day to day bills
-risk of failure
high NPR or ARR
-increased profitability
-increasing businesses retained profit
-increased total equity
-able to reinvest in further expansion of the business
-increased capacity
-EOS
low NPR or ARR
-low return on investment
-lower operating profit
-lower ROCE
-unable to pay dividends to shareholders
-less attractive to investors
-share price may fall
-difficult to raise capital in future
