ratios thoery Flashcards
Why GPM better
- increase selling price
- no inventory loss
- low purchase cost cheap supplier
Why PM is better
Ability to control operating expenses like wages, carriage outwards, depreciation
Why ROCE better
PFO improve
capital employed fell if told in Q
current ratio
It shows how much dollar current asset has to pay off each $1 of current liabilities.
Too low do not have sufficient current assets to pay off current liabilities and poor liquidity position.
too high ratio indicates non-utilisation of resources( idle cash, unsold inventory or lenient credit policy
TR
higher ratio will lead to reduced cash flows liquidity problems and it also
irrecoverable debts.
a strict credit policy reduce revenue as customers may switch over to competitors offering more lenient
credit terms.
TP
relationship with supplier
refuse to provide goods
cash only purchases
no discounts for prompt payment.
cash flows liquidity crisis if its short
of cash.
ROIT better
Product of business is in demand
Cash flow of business will be improved as less cash is tied up in inventory.
Inventory storage costs will reduce
NCA turnover
It shows ability of a business to
generate economic benefit from NCA
purchased more efficient non-current assets or is making more
efficient use of existing non-current assets which are generating higher revenues
Note: It is expressed in times. Such as ratio of 1.73 means that for every $1 of non-current assets, business is
generating $1.73 of revenue.
Working Capital Cycle
lower better
fewer days to receive cash from its working capital. receiving cash earlier from credit customers before making payment to credit suppliers which
is sign of better working capital management. Liquidity position of business
Net Working Assets To Revenue:
lower beter
A lower ratio shows that business is generating less revenue from buying more inventory and trade
receivables and more sales are based on cash. Thus revenue is also contributing towards liquidity of
business.
Advantages Of Ratio Analysis
Helps compare business’s performance with past year, competior, ind avg
It enables to set targets for next period
It also allows business to locate weaknesses within company
It enables to analyse efficiency, liquidity, profitability of business
Dis of ratios
Ratios are based on historical data
financial statements are window-dressed
cannot be used to compare businesses of different sizes in same industry
different accounting policie ACVO FIFO SLM RBM IAS GAAP
EPS better
high profit per share
expect better divident or retained earning
Divident cover
company can pay dividends more number of times from its profits, ability
to pay higher dividends
Divident yeild
getting a higher return(dividend-based) on their investment in shares or shareholders are getting higher dividend as
a percentage of market price.
PE
It shows investors are less confident of
future prospects such as lower profits, dividends or retained earnings.
gearing
It means it is less risky as below 50% thus investors are more willing to invest in company’s shares or lenders will be more willing to lend .
intest cover
pay interest more number of times
from its profits. Also this suggests that shareholders are likely to receive more dividends and lenders
will be confident that company can pay their interest from its profits.
lenders to give loan to company.
income gearing
Income Gearing it has higher finance costs which might reduce
profits.Also this shows is financed more by debt
