Ratio Analysis Flashcards
What are the five types of ratio?
1) Shareholder
2) Liquidity
3) Gearing
4) Profitability
5) Efficiency
When is a ratio most useful?
- When planning expansion objectives
- used in comparing/bench marking to other business in the same market
- used by shareholders to help decide whether to invest
What are the limitations of ratio analysis?
- if recordings aren’t accurate or they’re window dressed it may affect accuracy of objectives
- not timely (historic)
- may be hard to access accounts of rivals e.g ASDA
What is gearing?
It looks at the level of investment in the business that has come from long term loans
What does it mean when a business gets over 50% of its investment from gearing?
This business is considered to be highly geared and may want to think about the impact of borrowing more
What’s the Calculation for gearing?
Non current liabilities x100 divided by total equity + non current liabilities
What is ratio analysis defined as?
A method of assessing a firms financial situation by comparing two sets of linked data
What does the ROCE employed ratio show?
The operating profit as a percentage of capital employed
What does solvency mean?
A measure of a firms ability to pay debts on time
What does it mean when a firms insolvent?
it can meet its financial commitments
What is a ratio?
A financial tool which is applied to financial information to analyse data in detail
What does current ratio measure?
The ability of a business to meet its short term liabilities
How do you calculate current ratio?
Current assists divided by current liabilities
How do you calculate acid test ratio?
Current assets - inventories DIVIDED by current liabilities
