ratio analysis

Question 1

liquidity

Answer 1

•the ability of a business to repay their current liabilities from their current assets

Question 2

acid test ratio formula

Answer 2

•current assets - closing stock : current liabilities

Question 3

debt/equity ratio

Answer 3

•compares the proportion of capital acquired through long term loans/debt capital with the proportion raised via through retained earnings and issued share capital
•analyses the capital structure of the business

Question 4

formula for debt/equity ratio

Answer 4

•debt capital : equity capital

Question 5

comment on improved debt/equity ratio

Answer 5

•financial institutions would look favorably on any application for finance as they’re in a good position
•gives the business more freedom as they now have more finance options for expansion

Question 6

net profit margin formula

Answer 6

•net profit x 100
sales 1

Question 7

roi formula

Answer 7

•. net profit x 100
capital employed 1

Question 8

current ratio formula

Answer 8

•current assets : current liabilities

Question 9

what will a good roi mean

Answer 9

•attractive to investors.
•means business is successful at using the investment to generate high returns

Question 10

significance of going from bad roi to good roi

Answer 10

•easier to attract investors
•potential to fund expansion
•indicates increase in profitability

Question 11

easier to attract investors
(bad roi to good roi)

Answer 11

•potential investors more likely to provide capital when see return on investment improved from one year to next

Question 12

potential to fund expansion
(bad roi to good roi)

Answer 12

•business can choose to build capital reserves that can be used to fund expansion
•business more likely to be approved for finance to fund expansion

Question 13

indicates increase in profitability
(bad roi to good roi)

Answer 13

•indicates improvement in net profit due to increased sales and/or reduced expenses
•encourages mgt that they’re following correct course of action

Question 14

effects a decrease in sales revenue has on business

Answer 14

•reduction in profits
•possible redundancies
•sales promo needs to increase
•market research- new markets req

Question 15

what is meant by a liquidity problem

Answer 15

•the inability of a business to raise funds to pay short term debts as they fall due to

Question 16

current ratio formula

Answer 16

•current assets:current liabilities

Question 17

limitations of using financial ratios

Answer 17

•assets may not be shown at their true value
•ratios are based on past figures and not on projected future figures
•final accounts only hold for a certain year
•inflation/deflation may impede the comparison of ratios from one period to another

Question 18

what does high gearing mean

Answer 18

•firm had to make high interest payments resulting in low/no dividend payments to shareholders
•assets may be used as security
•may impact on ability to borrow in near future