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Business > Ratio Analysis > Flashcards

Ratio Analysis Flashcards

1
Q

L - What is the current ratio?

A

CA/CL

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2
Q

L - What does the current ratio show?

A

Whether a firm can pay its bills as they fall due, it is a liquidity ratio

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3
Q

L - What is a good current ratio?

A

1.5 : 1

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4
Q

L - What is the acid test?

A

CA-Stock/CL

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5
Q

L - What does the acid test show?

A

Due to the time it takes to turn stock into cash, it is a better measure at showing whether a firm can pay its bills when they fall due, doesn’t include stock

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6
Q

L - What is a good acid test ratio?

A

1:1

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7
Q

P - What is gross profit margin?

A

gross profit /turnover x 100

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8
Q

P - What does gross profit margin show?

A

A %, for every pound of revenue, how much profit, can be improved by increasing prices or reducing direct costs

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9
Q

P - What is net (operating) profit margin

A

net (operating profit) / turnover x 100

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10
Q

P - What should net profit show?

A

An improvement over time, a declining figure may indicate problems controlling overheads

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11
Q

P - What is ROCE?

A

Operating profit/Capital Employed x 100

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12
Q

P - What is capital employed?

A

total equity + long term liabilities

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13
Q

P - What does ROCE show?

A

Best profitability ratio, shows profit for every pound invested in the business, should improve over time and compare favourably with other firms in the industry, or UK average.

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14
Q

P - What is a good ROCE?

A

20% / 30%

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15
Q

P - What is ROE?

A

Profit for the year / Shareholder’s equity x 100

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16
Q

P - What does ROE show?

A

Measures how much profit is generated for every £1 of shareholder’s funds

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17
Q

E - What is Asset turnover?

A

Revenue/Non current assets

18
Q

E - What does asset turnover show?

A

How much revenue is generated for every £1 of non current assets - how hard assets are being worked, indicates capacity utilisation

19
Q

E - What is inventory (stock) turnover?

A

cost of sales/average stock held

20
Q

E - How is cost of sales calculated?

A

opening stock + purchases - closing stock

21
Q

E - How is average stock held calculated?

A

opening stock + closing stock / 2

22
Q

E - What format is inventory stock turnover in?

A

A number, shows how many times a firm will sell all of its stock each year. Need enough stock but not too much.

23
Q

E - What is creditor (trade payable) days?

A

payables/cost of sales x365

24
Q

E - What does creditor days show?

A

How many days on average it takes a firm to pay its creditors

25
Q

E - What is debtor (trade receivable) days?

A

receivables/revenue x 365

26
Q

E - What does debtor days show?

A

How many days on average it takes a firm to collect money.

27
Q

R/S - What is gearing?

A

Long term liabilities/Capital Employed x 100

28
Q

R/S - What does gearing show?

A

Where a business gets its capital from, the extent to which they are reliant on long term loans

29
Q

R/S - What is an ideal gearing?

A

Below 50%

30
Q

R/S - What is debt to equity?

A

Long term liabilities/equity x 100

31
Q

R/S - What does debt to equity show?

A

Compares the long term liabilities with share capital and retained profit

32
Q

R/S - What is interest cover?

A

Operating profit/interest payable (finance cost)

33
Q

R/S - What does interest cover show?

A

Measures how many times a business can pay its interest charges with the operating profit it makes - helps a company decide whether to borrow more

34
Q

R/S - What is a sufficient interest cover?

A

4 times

35
Q

S - What is dividend per share?

A

total dividends / no. of ordinary shares issued

36
Q

S - What does dividend per share show?

A

pence, shareholders looking for ST cash want it as high as possible, shareholders looking for LT return may be happy for it to be lower if capital reinvested in company

37
Q

S - What is dividend yield?

A

dividend per share/current market price x 100

38
Q

S - What does dividend yield show?

A

Shareholders looking for a ST return want high dividend, should be compared to the return you could get elsewhere

39
Q

S - What is earnings per share?

A

Net profit for the year/no. of shares issued

40
Q

S - What does earnings per share show?

A

Amount earned per financial year - likely that most will be retained to fund future growth

41
Q

S - What is price earnings ratio?

A

market price of share/earnings per share

42
Q

S - What does price earning ratio show?

A

Often reported in the press, used to compare 2 companies. The higher the PE ratio the higher the market think future earnings will be, share price up.

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