ratio analysis Flashcards
1
Q
gearing ratio
A
non current liabilities/capital employed x 100
2
Q
capital employed
formula aswell
A
Total assets - current liabilities
looks at how burdened a business is by loans
3
Q
interpreting gearing ratios
A
ideal - 25-50%
highly geared - over 50% means they have loads of loans compared to capital so may be risky for creditors
4
Q
return on capital employed (ROCE)
formula
A
Operating profit / capital employed x 100
5
Q
interpreting ROCE
A
the higher, the better but also have to look at industry average roce and also compare with if capital was invested elsewhere (opportunity cost) so for investment to be worthwile, roce should be much larger than capital invested
6
Q
limitations of ratio analysis
A
- only useful if compared over time and with competitors
- only accurate if financial accounts are accurate
- balance sheet only shows snapshot at end of year but doesnt show circumstances throughout year
- ignores qualitative factors
- businesses can manipulate accounts to present different financial picture
