Ratio Analysis Flashcards
Ratio Analysis
Converts monetary data into meaningful decisions for the business.
Useful to compare to other ratios.
Liquidity
Amount of cash a business has quickest access to enabling the pay off of liabilities
Liquidity funds
Cash in hand
Short term investments
Trade debtors
Liquidity Ratios
Acid Test
Current Ratio
Gearing
Acid Test Def
Assesses whether a business is able to cope with its immediate liabilities without selling any stock.
Acid Test Formula
(Current Assets - Stock) / Current Liabilities
Acid Test Interpretation
1:1 is ideal
1.2 or more suggests they are holding stock in an unproductive way
Current Ratio Formula
Current Assets / Current Liabilities
Current Ratio Def
A ratio that assesses the business’ ability to pay off short term obligations
Current Ratio Interpretation
<1.5 suggests a business may struggle paying off short term debts
>2 suggests a business may be holding too much in cash
Alterations in the acid test and current ratio
Increase or decrease in the time it takes to receive money owed or pay money you owe.
Increase or decrease in cash in the bank.
Gearing Ratio Def
A measure in the business’ capital structure. It measures the proportion of total capital that’s been obtained by debt.
Gearing Ratio Formula
(Non-Current Liabilities / Capital Employed) x100
Gearing Ratio Over 50%
Highly geared.
Gearing Ratio Less than 50%
Low gearing (it’s monthly repayments are not a significant proportion of all outgoings)
Evaluation of low gearing
Good - Safe
Bad - Less risk can be bad for businesses
