Ratios Flashcards
(33 cards)
What is ratio analysis?
A powerful financial tool that helps evaluate a business’s performance and financial health
It determines profitability, assesses funds to meet obligations, and gauges shareholder satisfaction.
What are the four main categories of ratios in ratio analysis?
- Profitability Ratios
- Liquidity Ratios
- Capital Structure Ratios (Gearing)
- Efficiency Ratios
These categories help in assessing different aspects of a business’s financial performance.
What do profitability ratios measure?
How effectively a business generates profit
These ratios indicate the ability of a company to generate earnings compared to its expenses.
What do liquidity ratios assess?
A company’s ability to meet short-term financial obligations
Liquidity ratios provide insight into the financial health of a business in the short term.
What do capital structure ratios evaluate?
The balance between debt and equity financing
These ratios help understand how a business is financed and its financial risk.
What do efficiency ratios examine?
How well a business utilizes its resources
These ratios measure the effectiveness of a company’s operations.
What is the significance of comparing a business’s performance over time?
It allows for evaluation of progress, such as this year versus last year
This comparison helps in understanding trends and making informed decisions.
What can businesses identify by analyzing financial ratios?
Strengths, weaknesses, and opportunities for improvement
Ratio analysis provides insights that can guide strategic planning.
What is the difference between cash and profits?
Cash refers to liquidity, while profits indicate overall financial performance
Understanding this difference is crucial for assessing a business’s financial health.
What are the limitations of financial statements and ratio analysis?
They relate to both financial and non-financial factors
Limitations may include lack of context, potential manipulation, and not capturing all aspects of performance.
What factors can be appraised using financial statements and ratios?
- Profitability
- Liquidity
- Efficiency
- Capital structure
These factors are critical in assessing business performance.
Fill in the blank: The _______ measures how effectively a business generates profit.
Profitability Ratios
Fill in the blank: The _______ assess a company’s ability to meet short-term financial obligations.
Liquidity Ratios
True or False: Ratio analysis can benchmark a business against competitors in the same industry.
True
Who are the internal stakeholders in ratio analysis?
Management and Employees
Management uses ratio analysis for performance monitoring, while employees are concerned about financial stability.
What is the primary use of ratio analysis for management?
To monitor performance, identify areas for improvement, and make informed decisions
This includes decisions on resource allocation, cost control, and profitability.
Why are employees interested in ratio analysis?
To assess job security and potential for bonuses or pay increases
Employees look for financial stability and profitability.
Who are the external stakeholders in ratio analysis?
Investors and Shareholders, Lenders and Creditors, Suppliers
These parties analyze ratios to assess profitability, repayment ability, and payment reliability.
What do investors and shareholders analyze in ratio analysis?
Profitability, return on investment, and overall financial health
This helps them decide whether to invest, hold, or sell shares.
What type of ratios do lenders and creditors focus on?
Liquidity and solvency ratios
These ratios evaluate the company’s ability to repay loans and meet financial obligations.
Why are suppliers interested in liquidity ratios?
To determine whether the business can pay for goods or services on time
Suppliers assess the financial reliability of their customers.
What role do regulators and government agencies play in ratio analysis?
Monitor financial ratios for compliance with legal and industry standards
They also assess tax liabilities and economic stability.
How might customers use ratio analysis?
Indirectly, through credit ratings to evaluate reliability and long-term viability
Customers assess a company’s trustworthiness as a supplier or service provider.
What do competitors analyze in ratio analysis?
Industry benchmarks and peer performance
This helps them compare efficiency, profitability, and market position.
