Ratios Flashcards
what is the purpose of ratio analysis?
- a calculation used to measure the performance of an organisation
- often used by investors both current and potential
- results can be conspired with the business’s past performance or with competition
- can be used to highlight areas where actions need to be taken in terms of financial positions
what are the three types of ratios?
- profitability ratios (3)
- liquidity ratios (2)
- efficiency ratios (1)
what are the three types of ratios?
- gross profit %
- profit of the year %
- return on equity employed %
what does profitability ratio measure?
how profitability and organisation is. usually used to analyse expenses, cost of inventory and the selling price
what are the two types of liquidity ratios?
- current ratio
- acid test ratio
what does liquidity ratio measure?
how able the business is to pay off short term debts and would highlight if a business sneered to arrange additionally finance to cover bills
what is the type of efficiency ratio?
-rate of inventory turnover
what is efficiency ratio?
measures how well the equity invested is being used
what is gross profit %?
- shows the profit made from buying and selling stock
- the higher the percentage the better
- shows how much gross profit is generate from everyone £1 of sales
what may have occurred for gross profit percentage increased?
- selling price may have be raised
- costs have been leered because cheaper supplier used
- increase in marketing activities - increase in demand
what may have occurred if gross profit percentage has decreased?
- costs have increased - cheaper suppliers should be located
- less marketing activities carried out may lead to less demand
- release of new profits form competitors therefore fewer sales
what is profit of the year %?
- used to measure the % of the rod it after expenses are deducted
- a low % means that expenses are too high and need to be controlled
- shows how much bent profit has been generated from every £1 of sales
if there’s an increase of profit of year this may be due to?
- gross profit has been higher
- expenses have been lower - cheaper alternative supplier have been located
if there is a decrease in profit of the year this may be due to?
- gross profit decrease
- expenses increase
what is return on equity employed %?
- shows investors what percentage return they would receive if they invested in the business
- they will want to see a high percentage further before investing
- a low % indicated that the business is making poor use of its capital resources
if there’s an increase in equity employed % that may mean?
- sales have increased - higher selling price and more marketing activities
- lower expenses
if there is a decrease in equity employed % that may mean?
- sales have decreased - less marketing activities or new competitors products
- expenses have been higher
what is current ratio?
- shows how able an organisation is to pay its short term debts. it would help a business to indicate whether they need additional finance to pay debts.
- an ideal ratio is 2:1 as this would mean that the business has double the amount of current assets compared to current liabilities - quite a stable financial position
- if it was any less the business may struggle to pay short term debts and the business needs to decrease it liabilities by then paying off creditors
- any higher than the business should ensure resources are not tied up and are used in the most effective way
increase in current ratio may mean?
- current liabilities have decreased - fewer creditors
- current assets have increased - more stock or money in the bank
decrease in current ratio may mean?
- current liabilities have increased -more creditors
- current assets have decreased-less stock or money in the bank
what is acid test ratio?
- shows how able an organisation to pay off its debts without having to sell stock.
- a ratio 1:1 is acceptable as this figures indicates the business can cover short term debts without relying on sale of stock
if there is an increase in acid test ratio this may mean?
- current liability have decreased
- current assets have increase
if there is an decrease in acid test ratio this may mean?
- current liabilities have increased
- current assets have decreased
what is rate of inventory turnover?
- measure the number of times inventory and to be replaced within a year
- a high figure means mass inventory sold rapidly
- a low figure means that the business needs to investigate ways of increasing sales
