Financial performance Flashcards
(11 cards)
How do you calculate ROCE
net profit/capital employed
What is capital employed
Shareholder funds (Net Assets) + Long term liabilities
What is working capital
Net current assets
What does liquidity mean
a business’ ability to turn its assets (current) into cash
What is the current ratio and what is a good range
CA/CL 1.5:1 to 2:1
what does a higher than usual ratio mean
the company is not using its assets to the fullest capability
What is the acid test calculation
CA-Stock/CL
What is the gearing ratio
LTL/Capital employed
why is the acid test good, what is the recommended range and what are the limitations
- better indicator of the liquidity of a company
- 1:1 to 1.5:1
- less relevant for high stock turnover companies
what are the pros cons and recommended range of gearing
pros
- can prevent future risk
- interest can impact future cashflows
Cons
- high gearing can be a good thing
- depends on what the borrowing is going towards
25% is medium and above 50% is high
What is a limitation of ROCE
doesn’t account for time Fram or show all factors involved
