lec 7 - ratios

Question 1

what do financial ratios provide/ are useful fo r

Answer 1

meaningful comparison between entities e,g which is more profitable

can compare finacnail psoition of firm over time

Question 2

what are the 3 things ratios can measure

Answer 2

profitability
liquidity

solvency

Question 3

ROCE

Answer 3

PBIT/NET CAPITAL EMPLOYED

Question 4

How do we calculate net capital employed

Answer 4

equity + NCL

Total assets - current liabilties

Question 5

what does ROCE shjow us

Answer 5

for every £1 of capital employed how much profit company generates

efficiency of comp in utilising capital to generate profit

Question 6

the higher the ROCE the

Answer 6

better

Question 7

gross profit margin

Answer 7

gross profit (rev-csot of sales)
/
revenue

x 100

Question 8

whats bad about gross profit amrgin

Answer 8

doesnt take into account any other costs but the costs of production

Question 9

differnce between margin and and mark up

Answer 9

mark up - profit is measured as a % of costs

margin - profit is measured as a % of revenue

Question 10

gross profit mark up

Answer 10

gross profit
/
cost of sales / TC(dEPENDS ON COMPANY POLICY)

• 100

Question 11

OPERATING profit margin

Answer 11

operating profit/

revenue

x100

Question 12

how do we work out operating profit

Answer 12

gross profit - (selling and distribution costs + aadmin costs)

Question 13

what does operating profit margin show

Answer 13

how much operating profit earned for every £1 of sales

Question 14

we can compare gross profit marign to operating profit margin to see

Answer 14

how much revenue is lost to expenses

Question 15

net profit maegin

Answer 15

net profit/revenue x 100

Question 16

net profit margin shows

Answer 16

% of sales that is neet profit

Question 17

net profit

Answer 17

Operating profit - finance - tax

Question 18

how can we compare the net profit to the operating profit - as in what does the commparison show us

Answer 18

how much rev is lost to expenses including interst

Question 19

if we need to calcaulte ROCE but no finance costs (as dont ake out debt ) and they say ignore tax waht profit figure do we use

Answer 19

net profit

Question 20

liquidity

Answer 20

ability to generate cash and satisfy st liablities - without which business willl fail

Question 21

company has a what to satisfy ST Liabilities

Answer 21

obligation

Question 22

working capital equation

Answer 22

CA - CL

Question 23

CA - CL why is this relevant to liquidity

Answer 23

copmany can only really use CA to pay em off
as fast for company to convert CA into Cash

Question 24

Current Ratio

Answer 24

CA/CL

Question 25

What does current ratio show us

Answer 25

extent to which CL are covered by CA

Question 26

Why dont we want the current ratio too high

Answer 26

indicate company not spenidn gmoney properly and it being too conservative

Question 26

conventionally what do we want our CA to be i.e the satisfactory level

Answer 26

2:1

Question 26

acid test ratio

Answer 26

current assets - inventory/ current liabilities

Question 27

in acid test ratio why do we takeaway teh inventories

Answer 27

aren't as liquid as other current assets hard for firm to turn all of inventory into cash

Question 28

why is it hard for the firm to turn inventory into cash

Answer 28

firm dont decide whether or not they can sell its the mkt demand that determines this if sel stock all now got to heavily discount - so wont get the full value

Question 29

measures of working capital manangemnt

Answer 29

payables days recievables days inventory days

Question 30

recievables days

Answer 30

how long takes to recieve payment from creditors

Question 31

payables days

Answer 31

how long it takes to pay credit suppliers

Question 32

what is inventory days

Answer 32

how long stock is held before it is sold

Question 33

the faster which days the better

Answer 33

recievbles

Question 34

what do we want to be higher in than the other ttype in term - P or R

Answer 34

P as we wannt more time to pay it off

Question 35

why is a high payables day good

Answer 35

interest free credit

Question 36

why do wwe want a high payables day but not too much as

Answer 36

want high - retain cash and I elsewehere rather than payback interst free borrowing not oo much affect company credit - mroe problems in the future supplier might stop supplying suggest dinancial weakness

Question 37

receivables days

Answer 37

receivables/revenue x 365 RR 365

Question 38

we want recievables back quick but waht is the good thing id company extends credit period

Answer 38

increase revenue as more people will be open

Question 39

payables dyas

Answer 39

PAYABLES /PURCHASES x 365

Question 40

inventory days

Answer 40

inventory/cost of sales x 365

Question 41

measures of solvency

Answer 41

gearing ratio leverage ratio

Question 42

what is solvency

Answer 42

ability to service and repay long term liablities i.e make interest payments and pay off full amount

Question 43

what are the two main sources of financing opration/projoects

Answer 43

equity debt

Question 44

equity is

Answer 44

issuing share and sellinghtem to stkh

Question 45

debt is

Answer 45

corporate bonds , bank loans etc

Question 46

why is equity less riskier than debt

Answer 46

debt - got financial obligatio ot make paymentsd where as with equity no obligation to make a return or payback sh repaymnet i s abig burden

Question 47

what do teh solvency ratios tell us

Answer 47

% of debt company has

Question 48

leverage/ debt to qeuity ratio

Answer 48

long term debt/equity x 100

Question 49

the leverage ratio is relative to

Answer 49

equity

Question 50

the gearing ratio is relative to

Answer 50

the whole source of finance

Question 51

gearing ratio

Answer 51

long term debt/long term debt + equity x 100

Question 52

if company got 20% equity how much debt do they have

Answer 52

80%

Question 53

the higher the debt

Answer 53

the higher the risk of solvency

Question 54

if you invest in a highly geared company in a good econ environwmnt what is likel

Answer 54

get lots of money back and vise versa

Question 55

if we wanna check if a firm can afford its deb s what do we check

Answer 55

interest cover ratoi

Question 56

what is the interest cover ratio

Answer 56

indicates companies ablity to service it's borrowing

Question 57

interest cover ratio formula

Answer 57

profit before interest /interest expense

Question 58

how can a modification of interest cover be obtained

Answer 58

replacing earnings with cash flows from operations

Question 59

profit before interest aka

Answer 59

operating profit