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Flashcards in Financial Ratios Deck (36):
1

What are non-current assets?

- Value of the assets that the business has purchased and expects to keep in the business for more than one year.

2

What are current assets?

- The assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.

Examples include:
- Cash balances
- Trade debtors (receivables)
- Stock

3

What are current liabilities?

- Amounts owed by the business that need to be paid within the next 12 months.

4

What are non-current liabilities?

Liabilities that are not due to be paid in the next 12 months but still need to be reflected in the balance sheet.

5

What is ratio analysis?

- The comparison of financial data to gain insights into business performance.

6

Who are the key users of profitability ratios? Give at least two examples.

At least two from:
- Shareholders
- Government
- Competitors
- Employees

7

Who are the key users of liquidity ratios?

- Lenders
- Suppliers
- Shareholders

8

Who are they key users of financial efficiency ratios?

- Shareholders
- Lenders
- Competitors

9

What do profitability ratios do?

- Assess the returns earned by a business from its trading activities and investments.

10

What does return on capital employed (ROCE) measure?

- Whether or not the business is making a satisfactory level of profit.

11

With regards to the ROCE percentage, what percentage is better?

- The higher the percentage the better.

12

With regards to operating profit, what percentage is better?

- The higher the percentage the better.

13

With regards to gross profit, what percentage is better?

- The higher the percentage the better.

14

What is the equation for current ratio?

Current assets/current liabilities

15

What is the purpose of the current ratio?

- To see if the business has enough liquidity - ability to pay its debts - in the short term (within a year).

16

What is the purpose of the acid test?

- To see if the business has enough liquidity to pay its debts in the short term. WITHOUT INCLUDING STOCK.

17

What is an ideal current ratio figure?

Above 1 - this means that the business has more current assets than it does current liabilities.

18

What is an ideal acid test ratio?

Above 1 - this means that the business has more current assets than it does current liabilities.

19

What is the purpose of gearing?

To see how reliant the business is on loans.

20

With regards to gearing, what percentage is best?

The lower the percentage, the better.

21

What is payables days?

How much time it takes the business to pay its debts.

22

What is receivables days, and should it be smaller or bigger than payables days?

How much time it takes the business to be paid by customers.

Smaller than payables days

23

What does inventory turnover refer to?

How many times a year a business is able to sell its stock.

24

Complete the sentence

The h__________ the inventory turnover, the ______ the business is at managing its stock.

- Higher
- Better

25

In what ways is ROCE useful?
Give at least one example.

At least one from:
- Useful to evaluate overall business performance.
- Useful to provide a target for individual projects.
- Useful to provide a benchmark against competitors.

26

How is return on capital employed calculated?

OPERATING PROFIT / TOTAL EQUITY + NON CURRENT LIABILITIES X100

27

How can ROCE be evaluated?
Give at least two examples.

At least two from:
- It is relatively easy to calculate and compare information between businesses and their competitors.
- Percentage figures will differ between industries.
- The data used is only a snapshot of business performance at a particular time.

28

How can current ratio be evaluated?
Give at least two examples.

At least two from:
- A ratio of above one means that the business has more current assets than it does current liabilities - efficient management of of working capital.
- A low ratio (well below 1) could suggest potential liquidity problems.
- Really high ratio could suggest that the business has too much working capital tied up in stock.

29

What is the acid test ratio formula?

Current assets (excluding inventories) / Current liabilities

30

How can the acid test ratio be evaluated?

- Less relevant for businesses with high stock turnover.

31

How is inventory turnover calculated?

Cost of goods sold / average inventories held

32

What might a fall in inventory turnover suggest?

- A build up of slow moving stocks.

33

Give at least three examples of the limitations of ratio analysis.

At least three from:
- one set of data is not enough.
- financial data used is from the past.
- the information might not be entirely reliable because it is possible for financial data to be manipulated.

34

Why might it be okay to have high gearing at the moment?

- Low interest rates mean that borrowing is cheap, meaning that it could potentially be the best option for it.

35

How is gearing calculated?

Long term liabilities / capital employed

36

What is the downside of selling shares to raise money?

- More profit is being given away to the shareholders through a dividend.