Financial ratios

Question 1

What is the current ratio?

Answer 1

Current ratio: this is one way to measure liquidity. It measures the level of current assets available to meet a business’s current liabilities. It shows the ability of business to meet its short-term debts.

Question 2

What is the formula for the current ratio?

Answer 2

Current ratio = current assets ÷ current liabilities

Question 3

What is the gearing ratio?

Answer 3

A gearing ratio, also known as a debt-to-equity ratio, is a financial metric that compares a company’s total debt to its shareholder equity. It indicates how much of a company’s operations are financed by debt compared to its own capital. - measures solvency

Question 4

What is the formula for the gearing ratio?

Answer 4

– gearing – debt to equity ratio (total liabilities ÷ total equity)

Question 5

What are the profitability ratios used for?

Answer 5

Profitability ratios are used to assess how well a company generates income relative to its revenue, costs, assets, or shareholders’ equity.

Question 6

what are the probability ratios?

Answer 6

profitability – gross profit ratio (gross profit ÷ sales);

net profit ratio (net profit ÷ sales);

return on equity ratio (net profit ÷ total equity)

Question 7

What are the efficiency ratios used for?

Answer 7

Efficiency ratios are used to assess how well a company utilizes its assets and resources to generate revenue, ultimately impacting operational efficiency and profitability.

Question 8

What is the expense ratio?

Answer 8

Expenses ratio = (total expenses ÷ sales) x 100

Question 9

What is the accounts recievable turnover ratio?

Answer 9

• How many days on average it takes to collect accounts receivables
• It evaluates how effective the business is at collecting credit.

Accounts receivable turnover ratio = Sales ÷ accounts receivable