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Business JSL > 8 - Ratio Analysis > Flashcards

8 - Ratio Analysis Flashcards

(89 cards)

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1
Q

What are the 2 liquidity ratios

A

Current ratio

Acid test ratio

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2
Q

How do you work out the current ratio

A

Current assets/current liabilities

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3
Q

How do you present answer for current ratio

A

Answer : 1

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4
Q

What is an ideal value for current ratio

A

2:1

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5
Q

Why is a >1:1 current ratio a concern

A

Indicates cash flow problems

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6
Q

Why is a <2:1 current ratio a concern

A

May be stock that can’t be sold

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7
Q

How to calculate acid test ratio

A

Current assets-stocks/current liabilities

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8
Q

What does an acid test ratio do that current ratio doesn’t

A

Takes into account that a firm may hold large amounts of stock

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9
Q

What are the activity/efficiency ratios

A

Asset turnover
Stock turnover
Debtor collection period
Creditor payment

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10
Q

What does efficiency/activity ratios show

A

How well a business manages its assets and liabilities l, including creditor and debtor days

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11
Q

How to work out asset turnover

A

Revenue/net assets

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12
Q

What is meant by net assets in asset turnover (efficiency ratio)

A

Non current assets

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13
Q

What does the answer for asset turnover tell you

A

The amount of revenue per £ of assets

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14
Q

How to work out stock turnover

A

Cost of sales/average stock held

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15
Q

What does the answer for stock turnover tell you

A

How many times stock is turned over each year

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16
Q

How do you work out how long it takes for stock to be turned over once

A

365/stock turnover

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17
Q

How to work out debtor collection period

A

Debtors/turnover x 365

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18
Q

What does the figure from debtors collection period tell you

A

How many days it takes debtors to pay you back on average

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19
Q

How to work out creditor payment

A

Creditors/cost of sales x 365

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20
Q

What does the figure from creditor payment tell you

A

How many days it takes you to pay back creditors on average

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21
Q

How to work out gearing ratio

A

Long-term liabilities/capital employed x 100

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22
Q

In gearing ratio, what will long term liabilities include

A

Loans and mortgages

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23
Q

What will capital employed include for gearing ratio

A

All investment that year eg loans, shares, retained profits

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24
Q

What does the gearing ratio mean

A

Works out the money that a firm owes back as a percentage of the liabilities’ total value

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25
What can it mean if a business is ‘highly geared’
It is high risk
26
What does interest cover look at
The ability for interest payments to be covered by profits
27
How to calculate interest cover
Profit before tax and interest/interest
28
What is profit before tax and interest also known as
Operating profit
29
What does the answer from interest cover show
The number of times a firm can cover interest through profit
30
What are the profitability ratios
``` ROCE Gross profit margin Net profit margin Operating profit margin Return on equity ```
31
What does ROCE stand for
Return on capital employed
32
How to work out ROCE
Operating profit/capital employed x 100
33
What does ROCE tell us
The value of returns/profits on capital employed, as a percentage of capital employed
34
How to work out gross profit margin
Gross profit/sales revenue x 100
35
What does the gross profit margin show us
What profit the firm makes as a percentage of their sales (minus cost of sales)
36
How to work out net profit margin
Net profit/sales x 100
37
What does the net profit margin tell us
Profits as a percentage of sales (after all expenses)
38
How to work out operating profit margin
Operating profit/sales x 100
39
What does operating profit margin tell us
Profits as a percentage of sales (after expenses)
40
How to work out return on equity
Profit for year/value of shares (shareholder equity)
41
What does return on equity tell us
How much profit is made per £ of shares
42
What are the shareholder ratios
``` Earnings per share (EPS) Price earnings ratio Dividend per share Dividend yield Dividend cover ```
43
How to calculate EPS
Profit for year/number of shares issued
44
What does EPS show
How much profit each share has earned over past year
45
How to calculate price earnings ratio
Market price of share/EPS
46
What does price earnings ratio show
The market price of a share in comparison to what it will earn
47
What does it mean if price earnings ratio = 10
The market price is 10x the earnings of that share
48
How to calculate dividend per share
Total dividends paid/number of ordinary shares issued
49
What does dividend per share tell you
What dividends will be received for each share
50
How to calculate dividend yield
Dividend per share (p)/share price(p) (p) = pence
51
What does dividend yield tell us
The dividend per share as a percentage of the share price
52
How to work our dividend cover
Profit after tax/dividends
53
What does dividend cover tell us
How many times dividends can be paid from net profits
54
What are the three types of investment appraisal
Payback Net present value (NPV) Average rate of return (ARR)
55
What does payback do
Works out how long it will take for an investment to generate enough revenue to cover its initial cost
56
What are the 3 columns in a payback table
Net cash inflow Net cash outflow Cumulative cash inflow
57
How to work out payback if it’s not exactly a year
Cumulative cash flow / net cash inflow
58
Advantages of payback
Simple to apply Preview risk of investment Tech is improving rapidly
59
Disadvantages of payback
Ignores cash flow after payback period | Only includes initial cost
60
What does net present value do
Forecast the value of an investment in future years
61
How to work out net present value in net present value table
Net return x discount factor
62
Why is discount factor included in net present value
Takes into account inflation
63
Advantages of NPV
Takes into account inflation | Compare different investment options
64
Disadvantages of NPV
Many assumptions | Difficult to calculate
65
What does ARR do
Measures the average profit gained as a percentage of the cost of an investment
66
Three steps to calculating ARR
1) Calculate total profit 2) Calculate average profit per year 3) average profit/total cost x 100
67
Advantages of ARR
Focuses on profit rather than payback | Easy to compare to other potential investments
68
Disadvantages of ARR
Uses average profits, even though it may be more profitable at different times Ignores inflation
69
What is meant by a budget
Allocating a set amount of money for a project/investment
70
What is meant by variance
The difference between the budget and the actual spending on the project
71
What is a positive variance
When spending is lower than the budget
72
What is a negative variance
When spending is higher than the budget
73
What does a cash flow forecast show
Predictions of indies and outflows in a business
74
Advantages of cash flow forecast
Helps to set targets Help to obtain finance Spot problems in advance
75
Drawbacks of cash flow forecast
Estimations | External factors are not included
76
Where is working capital found
On a balance sheet
77
What is working capital
Money available for day to day transactions eg buying stock, paying wages
78
How is working capital calculated
Current assets - current liabilities
79
What is meant by the working capital cycle
The amount of time it takes to turn working capital into actual cash (eg sell stock)
80
How to work out WCC
Average working capital/sales revenue x 365
81
What does depreciation mean
The reduction in the value of an asset over time
82
What is straight line depreciation
Where an asset decreases in value by the same amount each year
83
Advantages of straight line depreciation
Easy to understand | Depreciates less at beginning, inflating value of business slightly
84
Disadvantages of straight line depreciation
Unsuitable for technology that goes out of date Assumes lifespan Inflated value of business in early years
85
What is percentage depreciation
Where the value of an asset falls by a set percentage each year
86
Advantages of percentage depreciation
Depreciates more at beginning (true) | Keeps some value in later years
87
Disadvantages of percentage depreciation
Assumes loss of value in early years | Reduces value of business (maybe harder to borrow money)
88
What is meant by net book value
Value of an asset after depreciation is accounted for
89
What is meant by residual value
An assets value at the end of its lifetime

Business JSL (11 decks)

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