Ratio analysis Flashcards
1
Q
What is ratio analysis
A
- Analysing relationships between financial data to assess performance of a business
2
Q
ROCE - return on captial employed
A
Operating profit/Capital employed x 100
3
Q
ROCE evaluation
A
- Higher percentage is better
- Leased equipment not apart of it
- Watch out for trends
4
Q
Financial efficiency ratios
A
Assess how effectively a business is managing its assets
5
Q
Asset turnover
A
Revenue/net assets
6
Q
Evaluating asset turnover
A
- Rough guide to show how intensively a business uses its assets
7
Q
Limitations of ratio
A
- Takes no account of how profitable the revenue is
- Less relevant for labour intensive businesses
- Will vary widely from industry to industry
8
Q
Stock turnover
A
Cost of sales/average stock held
9
Q
Interpreting stock control
A
- Higher the number the better
- Low number suggests problem with stock control
10
Q
Improve stock control
A
- Sell of or dispose off slow moving or obsolete stocks
- Introduce lean production techniques to reduce stock holdings
- Make product range smaller so less stock held
11
Q
Evaluating debtor days
A
- Shows the average time customers take to pay
- Each industry will have a norm
- Look for comparisons
12
Q
Evaluating creditor days
A
- Higher figure the better
- Creditor days usually higher than debtor days
- High figure may suggest liquidity problems.
13
Q
Liquidity ratios
A
Assess whether a business has sufficient cash or equivalent current assets to be able to pay their debts as they fall due
14
Q
Evaluating current ratios
A
- 1.5-2 suggests efficient management of working capital
- Low ratio suggests cash problems
- High ratio: too much working capital?
