Ratios Flashcards
In what circumstance would you calculate the gearing ratio ?
Where capital adequacy ratio is less than 50%
How would you calculate the gearing ratio ?
All interest bearing debt
/
Sh funds x 100
Highly geared = lots of debt. Need to maintain profits in order to meet borrowing commitments.
What is the interest cover ratio and how is it calculated ?
Net profit before interest and tax
/
Interest paid
Shows number of times the interest payments can be met out of current profits
what does liquidity mean?
availability of cash to meet the needs of the business
how do you work out Working capital ratio and what does it show?
current assets / current liabilities
tells us how much current asset covr there is for each 1 pound of liabilities.
lwhat is liquid ratio and how do you work it out?
current assets exclu stock / current liabilities
this ratio strips out the stock. stock is the least easy asset to turn into cash
what is the operating/activity ratio and how do you work it out?
measure how efficiently a business is being run - how well it has used its resources
operating expenses / sales x 100/1
what is the breakeven ratio and how is it worked out?
breakeven analysis is significant in that it enables you to identify the sales volume necessary to cover all costs of the business and start to make a profit
Fixed costs / Gross margin %
what is a stock turnover ratio?
year & stock / costs of goods sold x 100/1
(Costs of good sold = opening stock + net purchases - closing stock)
calculates numbers of STOCK DAYS ON HAND
What is the capital adequacy ratio ?
Proprietors funds less intangibles
/
Total assets less intangibles
(Remember: proprietors funds = capital &reserves or shareholders funds or shareholders equity
Shows how much money the owners have in the business - higher = more protection for lender
