Ratio Analysis

Question 1

Gross Profit Percentage

Answer 1

• More or less profit being generated from sales
• Higher or lower sales prices
• COS lower or higher
• Different product mix from industry average

Question 2

Expense/Revenue Percentage

Answer 2

• Higher or lower cost s for distribution or admin

- Could be due to location (distribution)

Question 3

Operation Profit Percentage

Answer 3

• Less or more operating profit generated from sales
• Increase/decrease in sales margin
• Increase/decrease in expenses

Question 4

Return On Capital Employed

Answer 4

• Less or more profit after tax generated from capital employed (total equity plus non-current liabilities)
• Return is profit achieved on investment

Question 5

Return On Shareholders Funds

Answer 5

• The return for ordinary shareholders on their funds (ordinary shares and reserves)
• Less or more profit after tax being generated will show increase or decrease on funds returned

Question 6

Current Ratio

Answer 6

• More or less current assets available to meet current liabilities, so more or less solvent
• Higher or lower levels of trade rec, inventory or cash
• Higher or lower levels of trade pay, no overdraft

Question 7

Acid Test Ratio

Answer 7

• More or less current assets available to meet current liabilities, so more or less solvent
• Higher or lower levels of trade rec, or cash
• Higher or lower levels of trade pay, no overdraft

Question 8

Inventory Holding Period

Answer 8

• Sold slower or quicker than industry average
• If slower (old stock, less demand from customers)
• If quicker (new stock, more demand from customers)
• To many company resources in stock if worse than average (higher storage costs)

Question 9

Trade Receivables’ Collection Period

Answer 9

• Slower or faster collection.
• If worse (cash sales in revenue figure)
• Longer or shorter credit terms, poor or good credit control
• Bad or good for cash flow
• Irrecoverable debts if worse

Question 10

Trade Payables’ Collection Period

Answer 10

• Paying much quicker or slower than average
• Good or bad for cash flow
• Good or bad for goodwill
• Could lead to problems if paying to late

Question 11

Asset Turnover (Non-Current Assets)

Answer 11

• Using non-current assets less or more efficiently than average
• Revaluation or newer non-current assets could cause issues with generating income if worse, increasing income if better

Question 12

Asset Turnover (Net Assets)

Answer 12

• Using net assets less or more efficiently than average
• Revaluation or newer non-current assets could cause issues with generating income if worse, increasing income if better

Question 13

Interest Cover

Answer 13

• Operating profit does or does not cover interest payments more times than the industry average
• Caused by higher or lower operating profit
• Caused by higher or lower interest payments
• If better company is less risky
• Lower borrowing if higher than average
• Higher borrowing if lower than average

Question 14

Gearing

Answer 14

• Long term debt higher or lower than average
• Less risky if better than average (lower percentage is better)
• Lower interest payments if better than average
• Higher interest payments if worse than average
• If lower can borrow more

Question 15

Working Capital

Answer 15

• Sufficient working capital enables a company to hold adequate inventories
• Allows a measure of credit to customers
• The ability to pay suppliers

Question 16

Inventory Turnover

Answer 16

• Number of times a year inventory is turned over

- A turnover of 12 times a year means that about 30 days inventories are held