Ratios c2

Question 1

What does gross profit margin measure?

Answer 1

It compares the gross profit achieved by a business with the revenue it generated

Question 2

What is the calculation for gross profit margin?

Answer 2

Gross profit/sales revenue x100 = GPM%

Question 3

What is the ideal for GPM?

Answer 3

The higher the better, but overheads still have to be paid.

Question 4

How can the GPM be improved?

Answer 4

reducing cost of sales (e.g. cheaper supplier), increase sales/ revenue (e.g. lower price to up demand whilst keeping costs the same)

Question 5

What does the return on capital employed measure?

Answer 5

Compares the net profit achieved with the capital invested to achieve it. It measures how good the firm is at generating profit from funds invested.

Question 6

What is the calculation for ROCE?

Answer 6

Net profit/capital employed(SF+LTL) = ROCE%

Question 7

What is the ideal for ROCE?

Answer 7

The higher the better

Question 8

Additional info on ROCE?

Answer 8

The most important ratio, it measures profitability, can be used to compare competition.

Question 9

What does the Acid test ratio measure?

Answer 9

compares current assets and current liabilities but it deducts stock from current assets. This is because stock is the most illiquid CA.

Question 10

What is the calculation for Acid test ratio?

Answer 10

(Current assets - stock)/Current liabilities :1

Question 11

What is the ideal ratio for the acid test?

Answer 11

1:1

Question 12

what do low results for acid test mean?

Answer 12

they may have difficulty meeting short term debts, however, some businesses can operate on low results if money is tied up in stock e.g. redrow.

Question 13

How can the ATR be improved?

Answer 13

By reducing the levels of stock whilst maintaining overall current asset total.

Question 14

What does the net profit margin compare?

Answer 14

Compares net profit achieved with revenue generated.

Question 15

What is the calculation for net profit margin?

Answer 15

net profit/sales revenue x100

Question 16

what is the ideal for NPM?

Answer 16

The higher the better

Question 17

Which is a better indication or performance, GPM or NPM?

Answer 17

NPM as it shows how costs have been managed.

Question 18

How can the NPM be improved?

Answer 18

increase gross profit whilst keeping expenses the same OR maintain gross profit levels and reduce overheads

Question 19

What does the current ratio measure?

Answer 19

Looks at the Current assets and current liabilities, it examines the liquidity position of the firm.

Question 20

What is the calculation for Current ratio?

Answer 20

current assets/current liabilities :1

Question 21

What is the ideal for Current ratio?

Answer 21

approximately 1.5:1

Question 22

What if the current ratio is too high?

Answer 22

Too many resources tied up in unproductive assets.

Question 23

What if the current ratio is too low?

Answer 23

Might not be able to pay debts as they fall due.

Question 24

How to increase the current ratio if it’s too low?

Answer 24

sell under used assets(raise cash), increase long term borrowing(gearing), raise more share capital.

Question 25

How to lower the current ratio if it’s too high?

Answer 25

invest cash in the business(improve efficiency/buy assets), too much cash left for the business supposed to be risk takers.

Question 26

What does gearing measure?

Answer 26

It measures the long term loans as a proportion of a firm’s capital employed. It shows how reliant a firm is upon borrowed money.

Question 27

What is the equation for gearing?

Answer 27

long term liabilities/Shareholder funds+long term liabilities x 100

Question 28

What percentage is considered highly geared?

Answer 28

Above 50%

Question 29

Why are highly geared companies susceptible to financial difficulties?

Answer 29

Because they have to keep paying high interest payments even if sales fall

Question 30

What if the gearing % is too high?

Answer 30

If interest rates increase, this will increase cash outflow making it difficult to attract new investors.

Question 31

What if the gearing % is too low?

Answer 31

It can be positive as you’re not reliant upon borrowed money, however, could be considered too safe and not a risk taker.