Theme 3 Topic 14 - Ratio Analysis

Question 1

Define Gearing Ratio

Answer 1

Measures the proportion of a firm’s capital that is financed from long-term borrowing

Question 2

Gearing Ratio =

Answer 2

Non-Current Liabilities/Capital Employed x 100

Question 3

Capital Employed =

Answer 3

Non-Current Liabilities + Total Equity

Question 4

What is a sensible gearing ratio?

Answer 4

Between 25% and 50%

Question 5

What is a benefit of high gearing?

Answer 5

Relatively few shareholders means business owners keep control

Question 6

What is a benefit of low gearing?

Answer 6

Less risk from being exposed to more debt

Question 7

Define Return on Capital Employed (ROCE)

Answer 7

Measures the amount of profit made by a business in relation to the amount of finance invested

Question 8

ROCE =

Answer 8

Operating Profit/Capital Employed x 100

Question 9

What ROCE would a business want?

Answer 9

As high as possible, Higher than bank interest rates

Question 10

What are three limitations of ratio analysis?

Answer 10

Only as useful as the financial documents from which they are based, Must be compared over a long period of time to identify trends, Companies may manipulate their accounts