ratio analysis

Question 1

current ratio
- ideal ratio

Answer 1

• known as the working capital ratio
• ideal = 1.5 - 2
• below 1.5 the business might not have enough working capital to cover all their bills
• above 2 and the money in the business is tied up and not being used efficiently

Question 2

acid test ratio
- uses
- ideal

Answer 2

• used to judge the financial health of the business
• stock is excluded because it may be obsolete or not worth the stated value
• less than 1 means that the current assets do not meet their current liabilities = struggle to pay their bills

Question 3

ROCE (return on capital employed) ratio

Answer 3

• ROCE is a measure of the profitability of the business i.e. what it gets out of its resources
• the higher the ROCE figure the better
• demonstrates how hard the business made the money invested work

Question 4

limitations of ratio analysis:

Answer 4

1. no qualitative info = quality of product, staff, brand value
2. profit quality = sustainable? caused by one-off events?
3. external shocks
4. past indicators, not future indicators
5. you need multiple data to see trends over time