Business analysis and strategy - Unit 3 Flashcards
(25 cards)
Explain what’s meant by data analysis
The process of transforming raw data into useful information which can help us analyse business situations.
Define ‘index numbers’
A way of expressing data as a figure compared to a starting point, known as the base value.
State the formula to calculate index numbers
Index number for any time period = value in period / value in base period x 100
List the benefits of index numbers
> It makes numerical data easier to understand.
By standardising data, we can make comparisons.
Allows us to see changes in data over time.
Makes the construction of graphs a lot easier
List the limitations of index numbers
> Selecting the base year is difficult - how do we know this year is free from economic problems?
How can we be confident the information itself is valid?
Goods are constantly changing which means the change over time may not be a true reflection of events.
Define balance sheet
A financial statement which provides a summary of the assets and liabilities of a business at a particular moment in time.
List the main components of a balance sheet
> Current assets - Short term assets which are only to be retained in the business for a short period, often less than 12 months. Examples include stock and cash which can be converted into cash within 12 months of the balance sheet.
> Non-current assets - Long term assets which are expected to be retained for longer than 12 months and cannot be converted into cash within a year. Examples include property and equipment wearing over time.
> Current liabilities - The amount a business is due to pay within 12 months of the balance sheet. I|t’s essentially the short term debt of a business including tax liabilities.
> Non-current liabilities - Long-term financial obligations which are not likely to be paid within 12 months. Examples include a mortgage or large bank loan.
> Equity - Any funds contributed by owners or shareholders plus any retained earnings.
Define ‘depreciation’
An amount deducted from the original cost of an asset to take into account wear and tear of its use over time.
Explain why depreciation needs to be calculated
> It ensures profits are not overestimated and doesn’t mislead investors.
Ensures the value of the fixed asset is not overestimated which would inflate the value of the company as a whole.
Allows accounting provision to be made for the replacement purchase of new fixed assets in the future.
State the formula to calculate depreciation
Straight line depreciation = (asset cost - residual value) / useful life of the asset
Define gross profit margin and outline how it can be interpreted
A measure of profitability which essentially shows for every £1 of sales how much is gross profit. Between 25% and 35% is a healthy figure however larger businesses will strive for much higher than this.
State the formula to calculate gross profit margin
Gross profit margin = gross profit / sales x 100
Define net profit margin and outline how it can be interpreted
A measure of profitability which essentially shows for every £1 of sales how much is net profit. Between 7% and 12% is a healthy figure however larger businesses will strive for much higher than this.
State the formula to calculate net profit margin
Net profit margin = net profit / sales x 100
Define working capital and outline how it can be interpreted
Working capital is the cash needed to cover the day-to-day operations of the business such as wages, taxes and supplies. A positive figure suggests that the business has enough capital to cover this however a breakdown of assets and liabilities will give a greater indication.
State the formula to calculate working capital
Working capital = current assets - current liabilities
Define current ratio and outline how it can be interpreted
A liquidity ratio which demonstrates a business’s ability to pay short-term liabilities. An ideal figure lies between 1.5 and 2:1. Anything below this indicates cash problems and above this suggests too much working capital.
State the formula to calculate current ratio
Current ratio = current assets / current liabilities x 100
Define acid test ratio and outline how it can be interpreted
A liquidity ratio which demonstrates the business’s ability to pay off its short-term liabilities. Stock is taken away as not all assets can be turned into cash quickly. 1:1 is a good figure and below this indicates cash problems.
State the formula to calculate acid test ratio
Acid test ratio = (current assets - stock) / current liabilities x 100
Define gearing ratio and outline how it can be interpreted
A measure of the proportion of assets that are funded by long-term borrowing. It essentially sees whether a business has borrowed too much. A business with a gearing ratio above 50% is classed as highly geared and this indicates too much has been borrowed. Below 25% indicates a business could borrow more and a figure between 25% and 50% is seen as ideal.
State the formula to calculate the gearing ratio
Gearing ratio = long-term liabilities / capital employed x 100
Define return on capital employed (ROCE) and outline how it can be interpreted
A profitability ratio which indicates what returns a business has made based on the resources available to it. It measures how effectively capital has been invested. To analyse the figures, a business should compare it to the interest rate offered by banks.
State the formula to calculate return on capital employed (ROCE)
ROCE = net profit before tax / capital employed x 100
