Ratio Analysis

Question 1

What is return on capital employed (ROCE)?

Answer 1

Allows a business to compare operating profit with the total capital employed by a business

Question 2

ROCE Calculation

Answer 2

(operating profit / total capital employed) x 100

Question 3

What is current ratio?

Answer 3

Allows a business to explore its liquidity by comparing current assets with current liabilities

Question 4

Current ratio calculation

Answer 4

Current Assets / Current Liabilities

Question 5

What is gearing?

Answer 5

Used to calculate the proportion of long term funding which comes from debt

Question 6

Gearing Calculation

Answer 6

(Non-current liabilities / capital employed) x 100

Question 7

What are payable days?

Answer 7

Calculate the time taken for a business to pay those who it owes money to

Question 8

Payable days caluclation

Answer 8

(Payables / cost of sales) x 365

Question 9

What are receivables days?

Answer 9

Used to calculate the time taken for a business to collect the money that is owed.

Question 10

Receivables days calculation

Answer 10

(Receivables / revenue) x 365

Question 11

Advantages of financial ratios

Answer 11

• Allows businesses to compare performance across years
• Allows a business to compare themselves to competitors that have the information available

Question 12

Disadvantages of financial ratios

Answer 12

Does not take into account non-financial information such as changes in the external environment