Business Performance Indicators

Question 1

Stability

Answer 1

• the ability of a business to meet its debts and continue operation in the long term

Question 2

Return on Owner’s Investment (ROI)

Answer 2

• indicates how effectively a business has used the owner’s capital to earn profit
  formula:
  (net profit/avg. capital) x 100
• measures the profitability of the business from the owner’s perspective

Question 3

Reasons for changes in ROI

Answer 3

• increase = increase in net profit (usually better expense control) OR decrease in capital (drawings) while profit remains steady
• decrease = less net profit (poor expense control/sales) OR increase in capital (capital cont.) while profit remains steady

Question 4

Debt Ratio (DR)

Answer 4

• measures the risk (higher the DR, greater the risk that the business will fail to meet their debts and continue operation)
  formula:
  (total liabilities/total assets) x 100

Question 5

Reasons for change in DR

Answer 5

• increase DR = increase in liabilities quicker than assets (assets could remain steady) OR decrease in assets quicker than liabilities (liabilities could remain steady)
• decrease DR = increase in assets quicker than liabilities (liabilities could remain steady) OR decrease in liabilities quicker than assets (assets could remain steady)
• HOWEVER, must consider loan purchase leads to the purchase of a productive asset, therefore high DR not always bad