Ratios Flashcards
What is the current ratio, also known as the liquidity ratio or working capital ratio?
Measures current assets to liabilities. Essentially how well it can use its assets to pay for things when it needs them.
Ideal current ratio?
1.5 or 2:1
Current ratio equation
Current assets/current liabilities
Liquidity meaning
how easily an asset can be turned in to cash. Cash is very liquid but non current assets arent very liquid.
Money owed by debtors in inbetween
Solvent vs insolvent business
Solvent means the business can pay off their liabilities with their assets.
Insolvent means a business cant pay its debts
ROCE or Return on Capital Employed
Most important profitability ratio. Tells you how much money has been made by the business compared to how much has been put in. The higher the better
Whats it important to do with ROCE
Important to compare it to the BOE interest rates because it tells investors whether they’re better of putting their money in the bank.
ROCE Equation
Operating profit/total equity+NCL X100
How can ROCE be improved?
By paying off liabilities
Inventory turnover ratio
compares the cost of all sales a business makes over the year to the cost of average stock held.
Inventory turnover equation
cost of sales/cost average stock held
Inventory turnover ratio tells you what
How many times over the year the business sold all of its stock.
