Ratio analysis Flashcards
What is ratio analysis
*it is perfoming an analysis with financial statements by calculating certain ratios that will give you an indication of the financial standing or performance of the organisation
*it gives users information that is easily comparable between different industries and organisations
*will determine what information is important for them
Discuss the concept of proft ratio
*it is calculated to detemine the profitability of the organisation over the period under review
*it focuses mainly on the performance of the organisation and its ability to generate profts
*there are two main ratios which is net proft and gross proft
gross proft divided by total sales times a 100 0ver 1
net proft divided by total sales times a 100 over 1
How would you explain liquidity ratios to someone
*it refers to an organisation’s ability to meet its short term obligations
*The ratio will therefore measure the organisation’s ability to pay crediitors and other short term oligations on time
* cureent ratio-current assests divided by current liabilities
+quick ratio/acid ratio -current assests minus inventory of current liabilities
What is Activity ratio
*also called efficiency ratio, meausres the organisation’s ability to convert current assests and current liabilities into cash and sales
*Average inventory days - average inventory divided by cost of sales times 365 over 1 / 365 over inventory turnover ratio
*average collection peroid- average recievables times credit sales times 365 over 1
*average settlement peroid -average trade payables divided by credit purchases times 365 over 1
what is solvency
refers to an organisation’s ability to meet its obligations and will include short and long term obligations
total assests divided by total liabilities
Explain the concept of gearing
*It compares the organisations various sources of funding
*it compares the portion of finance obtaied from gearing vs debt
*it gives an indication of the organisation’s financial leverage
*high geraing means the organisation has a big portion of debt compared to equity and vice versa
*debt minus equity ratio