5. Ratios

Question 1

what is a ratio?

Answer 1

a figure compared to another and then expressed, in most cases, as a percentage

Question 2

what do you compare ratios to?

Answer 2

-the same ratio of a rival company
-the average for the industry
-the firms own ratios for the previous year

Question 3

what do ratios allow the company to do?

Answer 3

-highlight any problem areas that need attention
-highlight areas of improvement which they can continue to concentrate on

Question 4

what are the 3 types of ratios?

Answer 4

-profitability (performance) ratios
-liquidity ratios
-efficiency ratios

Question 5

what are profitability ratios?

Answer 5

a set of measurements used to determine the ability of a business to create earnings

Question 6

what are liquidity ratios?

Answer 6

measurements used to examine the ability of an organisation to pay off its short-term obligations

Question 7

what are efficiency ratios?

Answer 7

measure the ability of a business to use its assets and liabilities to generate sales

Question 8

what are the limitations to ratio analysis?

Answer 8

-information contained in final accounts is historical
-like must be compared with like
-findings may not take into account external factors (PESTEC), such as recession or the effects of inflation
-findings do not revel elements such as staff morale or staff turnover
-findings do nit reflect the implications or effects of new policies
-using different methods of stock valuation can result in different VALUE figures
-unless looking at percentage figures the impact of inflation is not reflected in comparative figures