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ACF100 > week 22 > Flashcards

week 22 Flashcards

1
Q

what are the measures of financial performance

A

gross profit margin
operating profit margin
net profit margin

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2
Q

why do we use ratios

A

financial statements provide information for users to evaluate financial performance and position of the company but are hard to compare
standardise information by accounting for size differences - allow comparability

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3
Q

what is cross-sectional analysis

A

compare different companies at the same time

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4
Q

what is time series analysis

A

same company over time

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5
Q

what are the four categories for ratios

A

measures of performance
measures of working capital
measures of solvency and liquidity
measures of return on investment and risk

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6
Q

what is measures of performance

A

measures of how the company is performing financially

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7
Q

what are measures of working capital

A

indicates the ability of the company to manage elements of working capital effectively

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8
Q

what are measures of liquidity and solvency

A

indicates the ability of the company to pay its liabilities as they fall due

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9
Q

what are measures of return on investment and risk

A

indicates the ability of the company to generate returns for its shareholders

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10
Q

what do performance ratio tell us

A

how efficiently a company is generating profit
contribution of income and expenses to financial profitability
performance of an entity regardless of how it is financed

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11
Q

give examples of performance ratios

A

gross profit margin
operating profit
net profit margin
return on capital employed
decomposition of ROCE
return on total assets

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12
Q

what do margins tell you

A

profit levels as a proportion of revenue

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13
Q

how do you calculate gross profit margin

A

(sales - cost of sales) / sales x 100
indicates a price premium a company commands for its products/services

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14
Q

how do you calculate operating profit margin

A

operating profit / sales x 100
indicates how efficiently a company can generate profit through its core operations

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15
Q

how do you calculate net profit margin

A

net profit / sales x 100
indicates how efficiently a company is able to generate profit, considering financing and tax expenses

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16
Q

how do you calculate return on capital employed

A

ROCE = operating profit / net capital employed x 100
or
operating profit margin x asset turnover ratio
indication of how effectively and efficiently a company has utilised its assets

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17
Q

how do you calculate net capital employed

A

equity capital + debt capital
or
total assets - current liabilities

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18
Q

how do you calculate asset turnover ratio

A

sales / (total assets - current liabilities)
measures a companies ability to generate sales from its assets
measures of level activity and productivity
different ratios in different industries due to different tech

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19
Q

how do you calculate return on total assets

A

operating profit / total assets x 100
does not take into account how assets are financed

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20
Q

how do you calculate average ROA over a year

A

average total assets = (total assets at year end + total assets at previous year end) / 2
ROA = operating profit / average total assets x 100

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21
Q

what is working capital

A

amount of capital required for daily operations

22
Q

why should you manage working capital

A

reduces need for short term financing
reduces pressure on cash

23
Q

how do you calculate net current assets

A

net current assets = current assets - current liabilities

24
Q

what are the three components of working capital

A

trade recievables
inventories
trade payables

25
Q

what are the two forms of working capital ratios

A

periods (number of days)
settlement period for trade receivables
payment holding for trade payables
inventory holding period
operating cash cycle
times
trade receivable turnover
trade payable turnover
inventory turnover

26
Q

how do you calculate settlement period for trade receivables

A

trade receivables / credit sales x 365 days
if you don’t know credit sales, use revenue

27
Q

what does settlement period show

A

time it takes for a company to receive cash from customers, longer settlement period means cash is occupied for longer

28
Q

how do you calculate average trade receivables over the year

A

(average trade receivables / credit sales) x 365 days

29
Q

what does the settlement period for trade receivables show

A

abnormally high period of credit may indicate poor credit control procedures
collection periods may be influenced by seasonal business
average period varies between industries

30
Q

how do you calculate payment period for trade payables

A

trade payables / credit purchases x 365 days
indicates average length the company pays trade payables
the longer the payment period, the shorter time the cash is occupied

31
Q

how do you calculate average period for trade payables

A

average trade payables / credit purchases x 365 days

32
Q

what does the payment period for trade payables show

A

if payment period is high relative to other firms, may indicate financial distress
beneficial to delay paying suppliers but may affect credit rating

33
Q

how do you calculate the inventory holding period

A

inventory / cost of good sold x 365
longer inventory hold, longer cash is occupied

34
Q

how do you calculate average inventory holding period

A

average inventory / cost of goods sold x 365 days

35
Q

how do you manage working capital

A

minimise the length of the operating cash cycle
shorter time between paying suppliers and receiving payments from customers

36
Q

what is the entire operating cycle

A

the period from buying goods to collecting sales generated cash

37
Q

what is the operating cash cycle

A

the period from paying for goods to collecting sales generated cash

38
Q

how do you calculate operating cash cycle

A

inventory holding period + settlement period for receivables - payment period for payables

39
Q

how do you calculate trade receivables turnover

A

credit sales / trade receivables
how many times a company collects its trade receivables during a year
the higher the turnover the shorter the time between sales and cash collection

40
Q

how do you calculate settlement period for trade receivables

A

365 days / trade receivables turnover

41
Q

what does high trade receivables turnover show

A

efficient collection of receivables
customers have low bargaining power
sales are mostly in cash rather than credit

42
Q

what does low trade receivables turnover show

A

inefficient collection of receivables
customers have high bargaining power
company is extending favourable credit terms to attract more customers

43
Q

how do you calculate trade payables turnover

A

credit purchase / trade payables
measures how many times a company pays off its trade payables over a year

44
Q

how do you calculate trade payables payment period

A

365 days / trade payables turnover

45
Q

what does high trade payables turnover show

A

suppliers have more bargaining power and demand for fast payment terms
the company may want to take advantage of early payment discount

46
Q

what does low trade payables turnover show

A

the company has more bargaining power than its suppliers so it can pay off the trade payables late
the company is in bad financial condition as it is unable to pay off the payables quickly

47
Q

how do you calculate inventory turnover

A

cost of goods sold / inventory
measures how many times a company can sell and replace inventory in a year

48
Q

what does low inventory turnover show

A

weak sales or excess inventory

49
Q

what does high inventory turnover show

A

strong sales or insufficient inventory

50
Q

how do you calculate inventory holding period

A

365 days / inventory turnover

ACF100 (26 decks)

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