P2 Hw 13- Ratio Analysis

Question 1

Gearing

Answer 1

Measures the proportion of a business’ capital provided by debt

Question 2

Formula for gearing

Answer 2

Non current liabilities
————————————————— x 100
Total equity + non current liabilities

Question 3

Capital employed

Answer 3

The total amount of capital used for the acquisition of profits by a firm or project

Question 4

What gearing ratio is ‘high’

Answer 4

Over 50%

Question 5

Why might high gearing ratio cause problems for a business

Answer 5

They are exposed to changing interest rates

Question 6

ROCE (return on capital employed)

Answer 6

Measures the % return a business makes on an investment decision

Question 7

ROCE formula

Answer 7

Operating profit
————————————————— x 100
Total equity + non current liabilities

Question 8

What is a good ROCE

Answer 8

At least 20% (but as high as possible)

Question 9

Ratio analysis

Answer 9

The use of quantitative analysis to assess profitability, liquidity and efficiency within a business

Question 10

Investment

Answer 10

The spending of money into a project which they hope will give them future return

Question 11

Debt finance

Answer 11

Using sources of finance that need to be repaid with interest

Question 12

Equity finance

Answer 12

Using sources of finance that don’t need to be repaid
E.g. retained profit