Ratio analysis

Question 1

What is ratio analysis

Answer 1

*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

Question 2

Discuss the concept of proft ratio

Answer 2

*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

Question 3

How would you explain liquidity ratios to someone

Answer 3

*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

Question 4

What is Activity ratio

Answer 4

*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

Question 5

what is solvency

Answer 5

refers to an organisation’s ability to meet its obligations and will include short and long term obligations
total assests divided by total liabilities

Question 6

Explain the concept of gearing

Answer 6

*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