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AQA Level Business > Ratio analysis > Flashcards

Ratio analysis Flashcards

1
Q

what is a balance sheet

A

a snapshot of the business’ assets and its liabilities on a particular day

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2
Q

what are non-current assets

A

assets unlikely to use in a year e.g.

  • land and buildings
  • plant and machinery
  • goodwill
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3
Q

what are current assets

A

assets likely to use in one year e.g.

  • cash balances
  • trade debtors (receivables)
  • inventories
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4
Q

what are current liabilities

A

liabilities likely to pay back in a year e.g.
- trade creditors (payables)
-short-term borrowings
accruals and provisions

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5
Q

what are non-current liabilities

A

liabilities not likely to pay in a year e.g.

  • long-term borrowings
  • other long term liabilities
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6
Q

what is current ratio

A

assess whether a business has to be sufficient cash or equivalent current assets to be able to pay its debts as they fall due

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7
Q

how do you find current ratio

A

current assets/current liabilities

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8
Q

what does a ratio of 1.5-2.5 suggest

A

acceptable liquidity and effect management of working capital

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9
Q

what does a low ratio suggest

A

indicates liquidity issues

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10
Q

what does a high current ratio suggest

A

too much working capital tied up in inventories/debtors

  • may have too much stock
  • may have too much debt owed
  • not using resources - cash sat doing nothing - should grow business
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11
Q

why do supermarkets have a low ratio?

A

don’t pay people back for 60-90 days but raise rev. quickly

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12
Q

can you compare ratio across industry

A

No, firms have different requirements for holding inventories or approaches to trade debt and credit

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13
Q

why is trend important in current ratio

A

sudden deterioration in current ratio = good indicator of liquidity problems

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14
Q

what is a gearing ratio?

A

measures proportion of business’ capital provided by debt

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15
Q

why is gearing ratio useful

A

measure financial health business

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16
Q

what does high gearing indicate

A

high business risk

17
Q

how do you find gearing ratio

A

(non-current liabilities/total equity + non-current liabilities) x 100

18
Q

what is considered a high gearing ratio

A

over 50%

19
Q

what is considered a low gearing ratio

A

lower than 20%

20
Q

what does level of acceptable gearing depends on

A

industry

21
Q

can you compare gearing across industries

A

no

22
Q

why is return on capital employed important

A
  • evaluate overall performance of business
  • provide target return for individual projects
  • benchmark performance w/ competitors
23
Q

how do you find ROCE

A

(operating or net profit/ total equity + non-current liabilities) x 100

24
Q

when is ROCE most useful?

A

comparison over time with key competitors

25
Q

what are trade payables?

A

money you have to pay someone else

26
Q

what are payable days?

A

time you have to pay someone back

27
Q

what are trade receivables

A

money someone else has to pay you

28
Q

what are receivable days

A

time others have to pay you back

29
Q

is it better that payable or receivable days are longer?

A

payable days longer than receivable days - good for cash flow

30
Q

why are low payable days good?

A
  • better relationship with supplier
  • can bargain lower prices
  • supplier will prioritise you if there is a shortage of that item
31
Q

how do you calculate receivable days

A

(trade receivables / revenue) x 365

32
Q

how do you calculate payable days

A

(trade payables / cost of sales) x 365

33
Q

if payable days are too high what does this suggest?

A

liquidity issues

34
Q

what does a low current ratio suggest about payable days

A

means payable days are high - severe cashflow problems

35
Q

what don’t ratios tell you

A
  • competitive advantage
  • quality
  • ethical production
  • future production
  • changes in external environment

AQA Level Business (3 decks)

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