Ratios Flashcards

1
Q

What do we use ratios to measure?

A

Liquidity, Stability and profitability

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2
Q

What is liquidity

A

The ability of a business to pay its debts as they fall due

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3
Q

What is stability

A

The ability of a business to survive in the long term

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4
Q

What is profitability

A

The ability of a business to make an acceptable level of profit.

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5
Q

What are current ratios

A

Current Ratios ( the measure of the ability of a business to pay its short-term debts, that is debts payable in 12 months or less)

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6
Q

Current Ratios Formula

A

Current Assets / Current liabilities x 100

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7
Q

Meaning when CR is < 100%

A

Indicates either that a business may find it difficult to pay its short-term debts or that the business is operating in an industry in which money is collected from sales very quickly

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8
Q

Meaning when CR is beween 100% and 200%

A

Indicates that a business should be able to pay its short-term debts

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9
Q

Meaning when CR is >100%

A

Indicates that a business should be able to pay its short-term debts and that the business has extra current assets available (wasted) excess

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10
Q

Quick Asset Ratio

A

A measure of the ability of a business to pay its more urgently repayable current liabilities using ONLY its more liquid current assets.

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11
Q

Quick Asset formula

A

Current assets except for inventory and prepaid expenses/ Current liabilities except for bank overdraft x 100

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12
Q

Quick Asset > 100%

A

Indicates that a business should be able to pay its short-term debts.

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13
Q

Quick Asset <100%

A

Indicates that in an emergency, a business may not be able to pay its short-term debts

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14
Q

What is Gearing?

A

Term used to describe the extent of the borrowings of a business.
-A highly geared business has large interest and loan repayments and has an increased risk of failure

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15
Q

Debit to Equity Ratio

A

Measures the gearing of a business

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16
Q

Debit to Equity Ratio formula

A

Total liabilities/ Equity x 100

17
Q

Debit to equiy ratio interpretation

A
  • No acceptable figure for the debt-to-equity ratio.
  • Small business may need to have a debt-to-equity ratio of about 70% or less.
  • larger business may successfully operate with a debt-to-equity ratio of 100% to 200% or even higher
18
Q

Profitability Ratio measuring

A

Four ratios that can be used as a measure of profitability are:
- Gross profit ratio
- Profit ratio
- Expense ratio
- Return on asset

19
Q

Gross Profit ratio

A

Shows the percentage of gross profit that is contained in each dollar of sales

20
Q

Gross Profit formula

A

Gross Profit / Net sales x 100

21
Q

An increase in this year’s gross profit could be caused by?

A

a) Increase in selling price of the inventory greater than any increase in purchase price of the inventory
b) Purchasing of inventory at a low price

22
Q

A decrease in this year’s gross profit could be caused by?

A

1) A decrease in the selling price of the inventory due to:
a) New competitors entering the market
b) A price war between competing businesses
c) A plan to increase market share by selling inventory at a cheaper price
2) An increase in the purchase price of the inventory greater than any increase in the selling price of the inventory.

23
Q

Profit Ratio

A

The profit ratio shows the percentage of profit in each dollar of sales.

24
Q

Profit Ratio Formula

A

Profit / sales x 100

25
Meaning of Profit ratio
Increase = Increase in the gross profit ratio or a reduction in expenses Decrease = expense increases that are not being fully passed on to consumers in the form of increased selling prices or increased competition causing the business to lower its selling prices.
26
Expense ratio
The expense ratio compares the sales of a business to the total of the selling and distribution, general and administration, and financial expenses.
27
Expense ratio formula
Expenses( other than COS) / Net Sales x 100
28
Return ratio
The return on assets measures how efficiently a business uses its assets to generate a profit
29
Return ratio Formula
Profit / Average Assets x 100