Week 5 - Consolidation Exercises Flashcards
Describe Operating profit margin
Operating profit margin = Operating profit / Sales
It is a test of an organisations efficiency and profitability.
Describe ROCE
ROCE stands for return on capital employed.
It represents a test of the organisations efficiency, indicating their ability to generate returns on the capital it controls.
Describe Current Ratio
Current ratio = Current assets / Current liabilities
It is a test of an organisations liquidity, it indicates the ability of an organisation to meet its short term liabilities with its current assets.
Describe Quick Test
Quick test = Quick assets / Current liabilities
Represents an organisations liquidity again, by indicating the ability of an organisation to meet its short-term liabilities with its day-to-day liquid assets, such as cash.
Describe Gearing
Gearing = Long-term liabilities / Ordinary share capital
A test of an organisations solvency, by measuring an organisations financial leverage.
At what point in an asset lifecycle would the ratios be used?
Feasibility/Concept stage, at the very start of the lifecycle.
Describe the risks involved in using the financial ratios as a base to make a capital investment decision.
(3 points)
- Financial ratios typically focus on historic data, not current.
- Ratio analysis does not take into account external factors, such as recession, or the human elements of companies.
- Ratio Analysis can only be used for comparison with other organisations of similar size and type.
Define ‘efficiency’.
A measure of how good and/or effective the company’s current management is.
Define ‘liquidity’.
The amount of working Capital that a business has.
Define ‘profitability’.
Is the business in good health, or is it a good investment?
Define ‘solvency’.
How close a business is to bankruptcy.
