Unit 3.6: ratio analysis Flashcards
Define financial ratio analysis
method to understand financial status
Define financial ratio analysis
method to understand financial status
What are the purposes of doing financia l ratio analysis (CONT. doc vic pls upload slides)
- track and identify expenses
- compare figures
- make the right financial decisions
Give the 5 types of financial ratios
1.) Profitability ratio
2.) liquidity
3.) efficiency
4.) Shareholders
5.) Gearing
Give the formulas for profitability ratio
- Gross profit margin: Gross profit/Sales Revenue
- Net profit margin: Net income / Sales revenue
Define gross profit margin and its purpose
- determine how money is being spent
- production
- bc COSG
Define Net profit margin and its purpose
- determines where money is being spent
- all expenses
Define the purpose for liquidity ratio
- Can the company pay debts when they’re due
Give the formulas for liquidity ratio
- current assets/current liabilities
- acid test: (total current assets - stock)/current liabilities
Why is stock subtracted to total current assets in liquidity ratio
Because stocks might take time to convert into money
What is the purpose of the acid test
- to do a ‘quick ratio”
- when you need money quick
What is the ideal ratio for liquidity ratio
(could be applicable to others? check the logic)
- 1:1
Define the purpose of the efficiency ratio?
- how well the business manages financial resources
Give the formula for efficiency ratio
- stock turnover: Cost of Goods sold / average stock;
Define cash to cash cycle
- trace the flow of cash
- expenses and profits
What is the factor of cash-cash cycle
- speed of business
Give gearing ratio formula
long term liability/capital employed x 100
Guve the shareholder ratio formula (?)
- return on capital employed: Net profit before interest and tax/ capital invested x 100
This is to see how effective a company’s capital investments are
Allows the company to see if their capital management is profitable (which is why they use net profit prior to tax and interest)
Define debtor days
- average no. of days to collect debts from customers/debtors
- aka debt collection period
Give the formula for debtor days
(debtors / totsl sales rev) x 365 days
Define debtors
Those indebted to the firm (owes money)
Possible strategies to improve debtor days ratio
- discounts or incentives to encourage earlier debt collection
- imposition of penalties (might lose long-time loyal customers)
- stop transactions w/ overdue debtors
- legal means such as court action
Define creditor days
- average no of days for a firm to pay its creditors (e.g. suppliers)
Give the creditor days ratio
creditor days ratio (number of days) = creditors/cost of sales x 365
Define insolvency
when a firm/person cannot pay off debts in time
Bankruptcy
- legal process
- person/firm cannot pay debt to creditors
Differentiate insolvency and bankruptcy
- insolvency: a state
- bankruptcy: legal process/declaration
Define stock turnover
cost of sales / average stock (x 365 if days)
- how quickly a firm’s stock is sold and replaced
Give the formula for average stock
(opening + closing stock) / 2
Possible strategies on how to improve stock turnover ratio (CONT.)
- obsolete goods disposed off (v sales revenue though)
- ## narrow down good sold (v variety)
Disclaimers on the stock turnover ratio
- not applicable to service businesses
- different optimal turnover rates
- usually ^ stock turnover good but must be selling stock at high gross profit margins
