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M92 - andy > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Are financial ratios required at law?

A

No

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2
Q

What do you use financial ratios for?

A

To understand more about the accounts/ the direction of the company/ can compare companies in the same sector

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3
Q

What are the two sets of ratios in chapter 9?

A

General ratios and insurers ratios

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4
Q

What is a profitability ratio measured in?

A

A percentage

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5
Q

What is a liquidity ratio measured in?

A

A number

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6
Q

What is days ratio measured in?

A

Days

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7
Q

What do activity ratios measure?

A

The same thing as productivity ratios but the opposite way round

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8
Q

What are profitability/ Non profitability ratios?

A

Gross profit percentage ratio
Net profit percentage ratio
Return on Capital employed (ROCE ratio)

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9
Q

What is a Gross Profit ratio

A

A profitability/ non- profitability ratio
Used for companies with stock only
Gross profit / sales (income/ turnover/ revenue) x 100

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10
Q

What happens if you have a decrease in the Gross Profit ratio

A

Not good.

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11
Q

What happens if there is an increase in the Gross profit ratio

A

Good. Can charge customers more/ better margin.

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12
Q

What is the Return on capital employed (ROCE) ratio?

A

A profitability ratio/ non profitability ratio

profit before interest charge and tax /
share capital + reserves + borrowings
x 100

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13
Q

Do you want the Return on capital employed ROCE high?

A

Yes. It means that you are showing shareholder money well. Outperforming bank interest rates etc.

The higher the risk the more shareholders will look for better returns on capital.

If you have a ratio of 5% it means you are making 5% on the money it’s been given from bank/ shareholders.

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14
Q

What is share capital?

A

he amount of money the owners of a company have invested in the business as represented by common and/or preferred shares

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15
Q

What is the net profit percentage ratio?

A

A profitability ratio/ non profitability ratio

Net profit/ sales (revenue/ turnover) x 100

If it increases over time it shows you have skilled management. If it decreases than the company may be deliberately increasing the overheads to coped with a future expansion

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16
Q

Why is Return on capital employed ROCE ratio an important measure

A

A low return could be wiped out in a recession
When aquiring a new company it should be high
A persistent low ROCE in a business division may signal its time to dispose of this division

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17
Q

What is a liquidity ratio?

A

Shows whether you’ve got enough current assets to meet your short term liabilities. Do you have enough liquid assets available?

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18
Q

With a liquidity ratio current ratio what figure should it be?

A

Above 1 at a bare minimum. 1.5 is normal. Below 1 you are a business heading towards bankruptcy. Your short term debt is higher than your short term assets (things you can turn quickly into cash)

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19
Q

What is the current ratio?

A

A liquidity ratio

current assets / current liabilities

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20
Q

What is the quick ratio

A

A liquidity ratio

current assets excl stock/ current liabilities

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21
Q

When will you use the liquidity quick ratio

A

When you are concerned whether the stock is turning over. When you have stock hanging around becoming obsolete.

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22
Q

What happens if the liquidity quick ratio is lower than one?

A

More obsolete stock which means they can’t sell their stock enough to meet their liabilities. Could go under.

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23
Q

What is the stock efficiency ratio?

A

An activity ratio

Cost of sales (purchases)/ closing stock

The lower the better. Measured in days. Want it to decrease. If the stock is turned over more slowly then the less cash is generated.

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24
Q

What is the gearing ratio? WILL COME UP

A

Shows where the company gets its money from

Long- term borrowings/ shareholders equity x 100

Will be a percentage

The higher the % the more the company relies on borrowing. If 110% ratio on the gearing ratio = long term borrowings is higher than shareholder funds so will be called a HIGH GEARED COMPANY. Reliance on long term borrowing.

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25
Q

What is the gearing ratio measured in? WILL COME UP

A

A percentage

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26
Q

Under the gearing ratio, if the long term borrowings is higher than its shareholder funds? WILL COME UP

A

its a high geared company- reliance on long term borrowing?

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27
Q

Under the gearing ratio, if the long term borrowings is a low percentage (15%/20%) WILL COME UP

A

low geared company. Get more from your shareholders than you do your banks.

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28
Q

A company has a gearing ratio of 25 to 50% what does it mean WILL COME UP

A

Normal.

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29
Q

A company has a gearing ratio of over 50% what does it mean WILL COME UP

A

High. - reliant on long term borrowing

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30
Q

Insurance industry ratios

What is the claims ratio

A

A %

Claims incurred net of reinsurance/ earned premium net of reinsurance x 100

No ideal % so will vary.

31
Q

Insurance industry ratio.

What is the combined ratio?

A

It measures the underwriting performance - is there sufficient premium to cover the cost of claims and expenses?

32
Q

Insurance industry ratio.

If a combined ratio is under 100% what does that mean?

A

A good underwriting performance rather than profitability. If it decreases its good.

33
Q

Insurance industry ratio

If a combined ratio is over 110% what does that mean?

A

Poor underwriting and catastrophe losses

34
Q

Insurance industry ratio

What are the three ratios that drive the combined ratio

A

The claims ratio.
The expenses ratio
The commissions ratio

35
Q

Insurance industry ratio

What is the claims ratio to calculate the combined ratio

A

claims incurred net of reinsurance/ earned premium net of reinsurance x 100

36
Q

Insurance industry ratio

What is the expenses ratio to calculate the combined ratio

A

administrative expenses (u/w, claims costs, offices/ earned premium net of reinsurance x 100

Ideally like it decreasing as it shows you have a control of expenses

37
Q

Insurance industry ratio

What is the commission ratio to calculate the combined ratio

A

acquisition costs/ earned premium net of reinsurance x 100

38
Q

Insurance industry ratio

How do you calculate the combined ratio

A

Claims ratio % + expenses ratio % + acquisition costs % / earned premium net of reinsurance x 100

A good combine ratio is the lower the better. Ideally below 100 at the very least as you’ve made underwriting profit.

39
Q

Can an insurer make money where the combined ratio is over 100?

A

Yes, it all depends on the investment income. If this is higher than the claims loss you still make money.

40
Q

What are the five frequently used ratios

A 
Profitability ratios
productivity ratios
liquidity ratios
activity ratios and
gearing ratios
41
Q

How do profitability ratios work

A

Compare percentage figures of sales to previous years

42
Q

What does it mean if a net profit percentage has decreased while the gross profit percentage has remained the same

A

It might indicate a lack of internal control over expenses

43
Q

What does the return on capital employed ratio enable an investor to see

A

Is the insurer is making money for them and make comparisons between companies

44
Q

When acquiring other businesses are moving into new markets should There be a high return on capital employed ratio

A

Yes to make it worthwhile for the capital providers

45
Q

What is profitability

A

It compares the money value of the output with the money value of the input the difference between the two is a profit

46
Q

What is productivity

A

It compares input an output directly so does not use money as a measuring rod

47
Q

Which ratio provides an indication of how successful the debt collection has been

A

Trade receivables, debtors/ sales x 365 days

48
Q

What is a payables/creditors efficiency ratio

A

Payables/creditors divided by purchase x 365 days

49
Q

which Ratio indicates the average number of days inventory/stock is held for

A

The inventory/stock turnover

Inventory, stock / cost of sales x 365 days

50
Q

What does a lengthening in the inventory/stock turnover period indicate

A

Slowing down of trading all the necessary build a stock/inventory

51
Q

Which ratio is all about showing how well a business is using the money they have been given regardless of the source

A

Return on capital employed ratio (ROCE)

52
Q

What are liquid assets

A

Assets that are either money or can we turn into money at short notice for example a short-term loan

53
Q

What is an example of a business that can trade with a low current ratio

A

Supermarket

54
Q

What do activity ratios do

A

They compare some aspects of the companies activities (usually sales or purchases) with the relevant balance sheet item

55
Q

What is the stock turnover ratio

A

Cost of sales/ average stock

56
Q

Under the stock turnover ratio Ibstock it turned over more slowly what does that mean

A

Bad as less cash is generated and relatively more cash is tied up in stock

57
Q

What is a debt turnover ratio

A

Sales/ debtors

58
Q

What is the credit turnover ratio

A

Purchaes/ creditors

59
Q

Under the credit turnover ratio what happened if there is an increase in the credit period

A

If it takes longer to pay suppliers effect the same if we borrowed more money to pay them the business had more liquidity that it would have otherwise

60
Q

Which ratio is the best to measure a companies future

A

The gearing ratio

61
Q

Insurance ratio

What is the solvency ratio

A

Net assets/ earned premium net of reinsurance

62
Q

Insurance ratio

The higher the figure for the solvency ratio means what

A

The stronger the company

63
Q

Insurance ratio

What is the solvency Coverage ratio

A

Surplus regulatory capital/ regulatory capital required

64
Q

Insurance ratio

What is the liquidity ratio formula

A

Total liabilities/ cash plus investments

65
Q

Insurance ratio

What is the return on equity ratio

A

Profit after tax/ shareholders equity x 100

66
Q

Insurance ratio

By a rough guide the investor should be making what time is the amount on the return of equity ratio

A

2.5 times. The higher figure merging the better the return

67
Q

What is the insurance gearing ratio

A

Long-term borrowings/ shareholders equity x 100

68
Q

Is it common for insurer that chooses to use debt capital to have a gearing ratio in a range of 10 to 25%

A

yES

69
Q

Insurance company with a gearing ratio below 10% would be regarded as what

A

Having a low level of gearing and above 40% as highly geared

70
Q

Insurance ratio

What is the commission ratio

A

Acquisitions/commissions ratio divided by Earned premium net of reinsurance x 100

71
Q

What is a good commission ratio

A

Usually between 10 to 20%

72
Q

What is the outstanding claims ratio

A

Outstanding claims net of reinsurance/ Net assets

73
Q

If the outstanding claims ratio is lower what does that mean

A

Below are the ratio of the more secure the position

M92 - andy (27 decks)

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