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Higher Business > Ratios > Flashcards

Ratios Flashcards

1
Q

what is the purpose of ratio analysis?

A
  • a calculation used to measure the performance of an organisation
  • often used by investors both current and potential
  • results can be conspired with the business’s past performance or with competition
  • can be used to highlight areas where actions need to be taken in terms of financial positions
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2
Q

what are the three types of ratios?

A
  • profitability ratios (3)
  • liquidity ratios (2)
  • efficiency ratios (1)
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3
Q

what are the three types of ratios?

A
  • gross profit %
  • profit of the year %
  • return on equity employed %
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4
Q

what does profitability ratio measure?

A

how profitability and organisation is. usually used to analyse expenses, cost of inventory and the selling price

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5
Q

what are the two types of liquidity ratios?

A
  • current ratio

- acid test ratio

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6
Q

what does liquidity ratio measure?

A

how able the business is to pay off short term debts and would highlight if a business sneered to arrange additionally finance to cover bills

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7
Q

what is the type of efficiency ratio?

A

-rate of inventory turnover

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8
Q

what is efficiency ratio?

A

measures how well the equity invested is being used

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9
Q

what is gross profit %?

A
  • shows the profit made from buying and selling stock
  • the higher the percentage the better
  • shows how much gross profit is generate from everyone £1 of sales
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10
Q

what may have occurred for gross profit percentage increased?

A
  • selling price may have be raised
  • costs have been leered because cheaper supplier used
  • increase in marketing activities - increase in demand
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11
Q

what may have occurred if gross profit percentage has decreased?

A
  • costs have increased - cheaper suppliers should be located
  • less marketing activities carried out may lead to less demand
  • release of new profits form competitors therefore fewer sales
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12
Q

what is profit of the year %?

A
  • used to measure the % of the rod it after expenses are deducted
  • a low % means that expenses are too high and need to be controlled
  • shows how much bent profit has been generated from every £1 of sales
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13
Q

if there’s an increase of profit of year this may be due to?

A
  • gross profit has been higher

- expenses have been lower - cheaper alternative supplier have been located

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14
Q

if there is a decrease in profit of the year this may be due to?

A
  • gross profit decrease

- expenses increase

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15
Q

what is return on equity employed %?

A
  • shows investors what percentage return they would receive if they invested in the business
  • they will want to see a high percentage further before investing
  • a low % indicated that the business is making poor use of its capital resources
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16
Q

if there’s an increase in equity employed % that may mean?

A
  • sales have increased - higher selling price and more marketing activities
  • lower expenses
17
Q

if there is a decrease in equity employed % that may mean?

A
  • sales have decreased - less marketing activities or new competitors products
  • expenses have been higher
18
Q

what is current ratio?

A
  • shows how able an organisation is to pay its short term debts. it would help a business to indicate whether they need additional finance to pay debts.
  • an ideal ratio is 2:1 as this would mean that the business has double the amount of current assets compared to current liabilities - quite a stable financial position
  • if it was any less the business may struggle to pay short term debts and the business needs to decrease it liabilities by then paying off creditors
  • any higher than the business should ensure resources are not tied up and are used in the most effective way
19
Q

increase in current ratio may mean?

A
  • current liabilities have decreased - fewer creditors

- current assets have increased - more stock or money in the bank

20
Q

decrease in current ratio may mean?

A
  • current liabilities have increased -more creditors

- current assets have decreased-less stock or money in the bank

21
Q

what is acid test ratio?

A
  • shows how able an organisation to pay off its debts without having to sell stock.
  • a ratio 1:1 is acceptable as this figures indicates the business can cover short term debts without relying on sale of stock
22
Q

if there is an increase in acid test ratio this may mean?

A
  • current liability have decreased

- current assets have increase

23
Q

if there is an decrease in acid test ratio this may mean?

A
  • current liabilities have increased

- current assets have decreased

24
Q

what is rate of inventory turnover?

A
  • measure the number of times inventory and to be replaced within a year
  • a high figure means mass inventory sold rapidly
  • a low figure means that the business needs to investigate ways of increasing sales
25
Q

if there is an increase in rate of inventory turnover?

A
  • increase in level of sales

- keeping up to date with customers wants and needs

26
Q

if there is a decrease in the rate of inventory turnover?

A
  • decrease in level of sales

- less marketing activities so there are fewer sales

27
Q

what are the benefits of ratio analysis?

A
  • good for comparing similar companies of similar size
  • good for making comparison trends over a period of years
  • ratios help to highlight and monitor issues need to be received
  • if ratios are attractive - they can convince investors in the business
28
Q

what are the limitation of ratio analysis?

A
  • figures are historic and do not show the future
  • business are difficult to compared because ether need to be exactly the same size and type
  • external factors are not taken into consideration
  • results do not show staff motivate or morale
  • new product development or launches are not taken into consideration
29
Q

what is gross profit calculation?

A

GP divided by sales x 100

30
Q

what is profit of the year calculation?

A

NP divided by sales x100

31
Q

what is return on equity employed calculation?

A

NP divided by equity employed x100

32
Q

what is current ratio calculation?

A

current assets divided by current liabilities :1

33
Q

what is acid test ratio calculation?

A

current assets - inventory divided by current liabilities :1

34
Q

what is rate of inventory turnover calculation?

A

cost of sales divided by average inventory = times

Higher Business (44 decks)

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