Financial Ratios Business Management Slide 14

Question 1

Name the types of financial ratio analysis

Answer 1

1.Liquidity ratios
2.Financial ratios
3.Profitability ratios
4.Activity / Efficiency ratios

Question 2

What does a liquidity ratio indicate

Answer 2

a firms ability to cover its short term obligations
Eg: pay bills for coming year , cover short term debt

Question 3

What is a financial ratio concerned about

Answer 3

the relationship between debt and equity and the stability of the business in the longer term.

Question 4

Name the financial ratio that is an indicator of how highly borrowed a business is

Answer 4

Financial ratios

Question 5

What is the profitability ratio an indicator of

Answer 5

the firms efficiency of operation

Question 6

How does profitability ratio indicate the firms efficiency of operation

Answer 6

Relate profit to sales
Relate Profit to the amount of capital invested in the business

Question 7

What does activity/efficiency ratio indicate

Answer 7

how efficiently the business is managing its working capital.

Question 8

What is the current ratio formula

Answer 8

Current assets
———————
Current liabilities

Question 9

Name the types of liquidity ratios

Answer 9

Current ratio
Quick ratio (acid test ratio)

Question 10

What does a current liquidity ratio measure

Answer 10

the capacity of a business to pay cash when its bills fall due

Question 11

What is an ideal current liquidity ratio.

Answer 11

2:1
But many business managers on a ratio of 1.5:1 or lower

Question 12

What is the quick ratio(acid test ratio) formula

Answer 12

Current assets - stocks
———————————
Current liabilities

Question 13

What does quick liquidity ratio measure

Answer 13

current assets e.g. cash, savings, debtors that can be quickly converted into cash relative to liabilities

Question 14

What is an ideal quick liquidity ratio

Answer 14

1:1 or greater

Question 15

What type of ratio is debt/equity %

Answer 15

Financial ratio

Question 16

What is the formula for debt/equity%

Answer 16

Long term debt
———————- X100
Owners equity

Question 17

What does debt/equity % measure

Answer 17

the longer term financial stability
Describes the relative proportions of long term debt and owners equity used to fund a business.

Question 18

What is considered a high debt/equity%

Answer 18

Levels of 50 to 60%

Question 19

What is the concept of debt/equity%

Answer 19

Financial risk increase as debt/equity increases but financial problems only follow when cash flow is insufficient to meet interest and repayments

Question 20

What type of ratio in interest cover ratio

Answer 20

Financial ratio

Question 21

What is the formula for interest cover ratio

Answer 21

PBIT
————
Annual interest

Question 22

What does interest cover ratio indicate

Answer 22

How many times the interest payable is covered by the profit
Of particular interest to lenders i.e. how vulnerable are the interest repayments to a fall in business profits

Question 23

What is an ideal interest cover ratio

Answer 23

A ratio of 4 or higher

Question 24

What type of ratio is gross profit to sales%

Answer 24

Profitability ratio

Question 25

What is the formula for gross profit to sales%

Answer 25

Gross profit —————— X100 Sales

Question 26

What does gross profit to sales % measure

Answer 26

The margin available to cover expenses and profit I.e what is left from sales to cover admin,selling , depreciation etc as well as taxes and provide a profit for owners/shareholders

Question 27

What type of ratio is net profit to sales %

Answer 27

Profitability ratio

Question 28

What is the formula for net profit to sales%

Answer 28

Net profit after tax ————————— X100 Sales

Question 29

What does net profit to sales % measure

Answer 29

•The margin left for distribution to the shareholders/owners and for retention for reinvestment in the business •i.e. how much of every €1 of sales is left and available to pay shareholders or re invest in the business

Question 30

What type of ratio is return on equity %(ROE)

Answer 30

Profitability ratio

Question 31

What is the formula for return on equity % (ROE)

Answer 31

Net profit after tax ————————— Equity

Question 32

What does return on equity % measure

Answer 32

performance from the point of view of the shareholders

Question 33

What type of ratio is stock days

Answer 33

Activity / efficiency ratio

Question 34

What is the formula for stock days

Answer 34

Average stock x 365 —————————- Sales (or COS)

Question 35

What does stock days measure

Answer 35

The number of days that stocks are held in the business Denominator can be either sales or cost of sales but important that you are consistent in order to compare over time

Question 36

What type of ratio is inventory(stock) turnover

Answer 36

Activity/Efficiency ratio

Question 37

What is the formula for inventory (stock) turnover

Answer 37

COS ——— Average stock

Question 38

What does inventory (stock) turnover measure

Answer 38

The average number of times the stock is turned over Indicates how good the business is at turning stock into sales revenue

Question 39

What type of ratio is debtor days

Answer 39

Activity / Efficiency ratio

Question 40

What is the formula for debtors days

Answer 40

Trade debtors x 365 —————————— Sales

Question 41

What does debtors days measure

Answer 41

The time taken to receive payment from credit customers (i.e. your debtors) Also indicates the amount of “credit given”

Question 42

What type of ratio is creditor days

Answer 42

Activity / Efficiency ratio

Question 43

What is the formula for creditor days

Answer 43

Trade creditors x 365 —————————— Cost of sales (or purchases)

Question 44

What does creditor days ratio measure

Answer 44

The time taken to pay suppliers Also measures the average number of days credit that the business receives

Question 45

What ratios should be consistent over time with the denominator for comparison over time (can be sales or COS)

Answer 45

Stock Days Creditor Days