Ratios - the worst thing in the world

Question 1

Types of ratios

Answer 1

Efficiency, liquidity and profitability

Question 2

Profitability ratios

Answer 2

gross profit percentage
Profit for the year percentage
Return on equity employed

Question 3

Gross profit percentage

Answer 3

Gross profit/sales x 100

Question 4

Profit for the year percentage

Answer 4

Profit for the year / sales x 100

Question 5

Return on equity employed

Answer 5

Profit for the year / opening equity x 100

Question 6

Liquidity ratios

Answer 6

Current ratio
Acid test

Question 7

Current ratios

Answer 7

Current assets/ current liabilities

Question 8

Acid test ratio

Answer 8

Current assets - closing stock / current liabilities

Question 9

Efficiency ratios

Answer 9

Rate of stock turnover

Question 10

Rate of stock turnover

Answer 10

Cost of sales / average inventory

Question 11

Uses of ratios

Answer 11

Compare against competitors
Calculate profitability liquidity and efficiency of business
Used to aid decision making by directors or managers
Compare the business performance to previous years
Highlight aspects of the business that need improvement

Question 12

Limitations of ratios

Answer 12

Historical information may be out of date.
Don’t take external factors into account
Don’t take internal factors such as employees into account.
Comparison must be between businesses of the same size and market.