Ratio analysis Flashcards
Current Ratio formula
Current assets / Current liabilities
Return on capital employed formula
Operating Profit / (Total Equity + Non-Current Liabilities)
x100
Inventory turnover formula
Cost of goods sold / Inventories
Payable days
Payables / Cost of Sales
x365
Receivable days
Receivables / Revenue
X365
Gearing formula
Non-Current Liabilities / (Total Equity + Non-Current Liabilities)
x100
Ratio analysis advantages
Monitor performance
Monitor targets
Inform shareholders of performance
Ratio analysis disadvantages
Can be limited if there is no data to compare with
Accounts can be manipulated
Current ratio measures what?
Liquidity
Return on capital employed measures what?
Profitability
Payable days measures what?
Efficiency
Receivable days measures what?
Efficiency
Gearing measures what?
Gearing
Inventory turnover measures what?
Efficiency
The ability to meet short term debts is shown in which ratio?
Current ratio
Return on capital employed tells a business what?
The total resources that a business has available to it
Inventory turnover shows what to a business?
How many times it sells all of its stock annually
Payable days shows what?
How long it takes a business to repay its creditors e.g. suppliers
Receivable days shows what?
How long it takes to receive payment from its debtors e.g. customers taking out finance
Gearing shows a business what?
How much of the business is financed by long term debt
A low payable days suggests the business can?
Pay its debts quickly
Advantages of a low payable day?
Suppliers more likely to trust the business
Avoids interest fees
Could be more inclined to receive supplier discounts
Disadvantages of a high payable day?
Suppliers less likely to give discounts
Suppliers less likely to trust the businesses reliability
Advantages of a low gearing ratio?
Less of the business financed by long term debt
Less profits going to paying off debt
Maximises profits and dividends for shareholders
More appealing when looking for creditor to lend money e.g. bank loans
Advantages of high payable days?
Gives the business more time to pay debts
Advantages of high inventory turnover?
Shows the business is able to keep stock flowing through the business quickly
Shows they have the potential to keep up with changes in the market i.e. trends in a clothing market
Advantages of current ratio above 1?
Able to meet short term debts
Disadvantages of high current ratio?
Finance tied up in stock that could be used to invest elsewhere in the business
