chapter 9 Flashcards
(32 cards)
What does the gross profit percentage show?
The profit made on goods before expenses, expressed as a percentage of sales.
What does a falling net profit % with a stable gross profit % suggest?
A: Rising business expenses or poor cost control.
What is ROCE used for?
To measure how efficiently a company uses its capital to generate profits.
How is debtor days calculated and what does it show?
A: (Trade Receivables ÷ Sales) × 365; shows how quickly a company collects payment from customers.
What does a long creditor days ratio imply?
A: The business delays paying suppliers – may help cash flow but risk damaging relationships.
What’s the difference between profitability and productivity?
A: Profitability looks at profit vs. costs in money; productivity looks at physical output vs. input.
Why might a supermarket operate with a current ratio below 1?
A: They sell for cash and buy on credit, needing fewer liquid assets.
What are the five main types of financial ratios?
A: Profitability, Productivity, Liquidity, Activity, Gearing.
What does the gross profit percentage ratio show?
A: Profit made after deducting cost of sales.
What does ROCE measure?
A: Efficiency in using capital to generate profits.
What’s the difference between profitability and productivity?
A: Profitability compares money value of inputs/outputs; productivity compares physical input/output.
What does a current ratio below 1 mean?
A: The company may not be able to cover short-term debts.
What does the stock turnover ratio measure?
A: How quickly a company sells its inventory.
What does a high gearing ratio mean?
A: High reliance on borrowed funds – higher risk.
How is the combined ratio calculated?
A: (Claims + Expenses + Acquisition Costs) ÷ Net Earned Premium × 100
What does a combined ratio below 100% indicate?
A: Profitable underwriting.
A combined ratio of 90% means the insurer spends only 90p for every £1 — leaving 10p profit from underwriting.
What is a good ROE percentage?
A: Typically between 15–20%.
10–15% is considered average.
15–20% is strong, showing efficient use of shareholder equity.
20%+ is excellent, often seen in high-growth companies
What does the commission ratio measure?
A: The % of earned premiums paid to brokers/intermediaries.
What is the typical range for commission ratios?
A: Between 10% and 20%, but can be higher.
Why must insurers be careful about paying high commissions?
A: High commissions reduce profit but may be necessary to attract quality business.
What type of premiums should be used in insurance ratios?
A: Earned premiums net of reinsurance — for consistency.
What does a combined ratio above 100% mean?
A: The insurer made an underwriting loss.
How can a company with a combined ratio >100% still make a profit?
A: If investment income exceeds the underwriting loss.
What is the outstanding claims ratio?
A: Outstanding claims ÷ Net assets.
