Ratios

Question 1

What are the 6 ratios?

Answer 1

Gross Profit Margin
Operating Profit Margin
Gearing Ratio 
Current Ratio
Payable Payment Days
Receivables Collection Days

Question 2

What is the formula for Gross Profit Margin?

Answer 2

Gross profit/turnoverx100

Question 3

What is the formula for Operating Profit Margin?

Answer 3

Operating profit/turnoverx100

Question 4

What is the formula for Current Ratio?

Answer 4

Current Assets/Current Liabilities

Question 5

What is the formula for Gearing Ratio?

Answer 5

Long Term Debt/Total Capital Employedx100

Question 6

What is the formula for Payables Payment Days?

Answer 6

Payables/cost of salesx365days

Question 7

What is the formula for Receivables Collection Days?

Answer 7

Trade Receivables/turnoverx365days

Question 8

What does Gross Profit Margin calculate?

Answer 8

Gross profit earned from £1 of sales

Question 9

What does Operating Profit calculate?

Answer 9

Net profit earned from £1 of sales

Question 10

What does Current Ratio calculate?

Answer 10

Coverage of short term liabilities by short term assets, usually the answer should be more than 2
the higher the ratio the more stable the company is. the lower the ratio the greater risk of liquidity associated with the company

Question 11

What does Gearing Ratio calculate?

Answer 11

% of borrowed finance to equity funding
a high gearing ratio represents a high proportion of debt equity, and a low gearing ratio represents a low proportion of debt to equity

Question 12

What does Paybles Payment Days calculate?

Answer 12

Time taken to pay creditors to pay their bills

Question 13

What does Receivables Collection Days calculate?

Answer 13

Time taken by debtors to pay their invoices

Question 14

What does efficiency ratios do?

Answer 14

calculate efficiency of asset utilization

Question 15

What does profitability ratios do?

Answer 15

calculates ability to generate profit (long term survival)

Question 16

What does solvency ratios do?

Answer 16

calculates ability to meet debt obligations with cash as they fall due to payment

Question 17

What ratios is solvency ratios?

Answer 17

current ratio

Question 18

What ratios are efficiency ratios?

Answer 18

Payables payment days and Receivables collection days

Question 19

What ratios are profitability ratios?

Answer 19

Gross profit margin and Operating profit margin

Question 20

What is the importance of ratios?

Answer 20

we use ratios to check how profitable a business it.

ratio analysis can help us check if a business is doing better/worse that previous years.

Question 21

What is ratio analysis?

Answer 21

involves comparing one figure against another to produce a ratio, and assessing whether the ratio indicates a strength or a weakness in a company affairs.

Question 22

What do ratios identify?

Answer 22

trends, comparisons of ratios with similar companies, company performance relative to its competitors

Question 23

What ratio is is gearing ratio?

Answer 23

Basic gearing

Question 24

What does gearing ratios calculate?

Answer 24

calculates how organisations are funded in terms of the proportion of debt to equity.

Question 25

What are positives of current ratio?

Answer 25

one of the most useful ratios because it helps determine the liquidity position of the business, as well as helps understand how cash rich a company is, determine short term financial strength, gives an idea of operating cycle, shows managements efficiency in meeting the creditors demands.

Question 26

What are the main advantages to any ratios?

Answer 26

comparisons, industry analysis, stock valuation, planning & performance

Question 27

What is liquidity?

Answer 27

the availability of liquid assets to a market or company/liquid assets=cash

Question 28

What are the disadvantages to current ratio?

Answer 28

may lead to overestimation of the liquidity position because it includes inventory in the calculation, in companies where sells are seasonal current ratio may show lower numbers in some months and higher current ratio in the other, an equal increase of decrease in the current assets and current liabilities can change the ratio.