Unit 3.6: ratio analysis

Question 1

Define financial ratio analysis

Answer 1

method to understand financial status

Question 2

Define financial ratio analysis

Answer 2

method to understand financial status

Question 3

What are the purposes of doing financia l ratio analysis (CONT. doc vic pls upload slides)

Answer 3

• track and identify expenses
• compare figures
• make the right financial decisions

Question 4

Give the 5 types of financial ratios

Answer 4

1.) Profitability ratio
2.) liquidity
3.) efficiency
4.) Shareholders
5.) Gearing

Question 5

Give the formulas for profitability ratio

Answer 5

• Gross profit margin: Gross profit/Sales Revenue
• Net profit margin: Net income / Sales revenue

Question 6

Define gross profit margin and its purpose

Answer 6

• determine how money is being spent
• production
• bc COSG

Question 7

Define Net profit margin and its purpose

Answer 7

• determines where money is being spent
• all expenses

Question 8

Define the purpose for liquidity ratio

Answer 8

• Can the company pay debts when they’re due

Question 9

Give the formulas for liquidity ratio

Answer 9

• current assets/current liabilities
• acid test: (total current assets - stock)/current liabilities

Question 10

Why is stock subtracted to total current assets in liquidity ratio

Answer 10

Because stocks might take time to convert into money

Question 11

What is the purpose of the acid test

Answer 11

• to do a ‘quick ratio”
• when you need money quick

Question 12

What is the ideal ratio for liquidity ratio

Answer 12

(could be applicable to others? check the logic)
- 1:1

Question 13

Define the purpose of the efficiency ratio?

Answer 13

• how well the business manages financial resources

Question 14

Give the formula for efficiency ratio

Answer 14

• stock turnover: Cost of Goods sold / average stock;

Question 15

Define cash to cash cycle

Answer 15

• trace the flow of cash
• expenses and profits

Question 16

What is the factor of cash-cash cycle

Answer 16

• speed of business

Question 17

Give gearing ratio formula

Answer 17

long term liability/capital employed x 100

Question 18

Guve the shareholder ratio formula (?)

Answer 18

• 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)

Question 19

Define debtor days

Answer 19

• average no. of days to collect debts from customers/debtors
• aka debt collection period

Question 20

Give the formula for debtor days

Answer 20

(debtors / totsl sales rev) x 365 days

Question 21

Define debtors

Answer 21

Those indebted to the firm (owes money)

Question 22

Possible strategies to improve debtor days ratio

Answer 22

• 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

Question 23

Define creditor days

Answer 23

• average no of days for a firm to pay its creditors (e.g. suppliers)

Question 24

Give the creditor days ratio

Answer 24

creditor days ratio (number of days) = creditors/cost of sales x 365

Question 25

Define insolvency

Answer 25

when a firm/person cannot pay off debts in time

Question 26

Bankruptcy

Answer 26

• legal process
• person/firm cannot pay debt to creditors

Question 27

Differentiate insolvency and bankruptcy

Answer 27

• insolvency: a state
• bankruptcy: legal process/declaration

Question 28

Define stock turnover

Answer 28

cost of sales / average stock (x 365 if days)
- how quickly a firm’s stock is sold and replaced

Question 29

Give the formula for average stock

Answer 29

(opening + closing stock) / 2

Question 30

Possible strategies on how to improve stock turnover ratio (CONT.)

Answer 30

• obsolete goods disposed off (v sales revenue though)
• ## narrow down good sold (v variety)

Question 31

Disclaimers on the stock turnover ratio

Answer 31

• not applicable to service businesses
• different optimal turnover rates
• usually ^ stock turnover good but must be selling stock at high gross profit margins