Business Ratios

Front 1

What is a profitabilty ratio?

Back 1

Measure of how profitable the organisation is. These ratios are used to analyse the organisations expenses, cost of stock and selling price.

Front 2

What is a Liquidity ratio?

Back 2

Measure of how ablke the organisation is to pay its short term debts. These ratios would indicate id an organisation needed to arrange additional finance to pay its bills.

Front 3

What is an efficiency ratio?

Back 3

Measure of how well the capital invested into the company is being utilised and if the organusatuib is preforming as efficently as it can.

Front 4

What are the profitability ratios?

Back 4

Gross profit percentage, Net profit percentage, and return on capital employeed (ROCE)

Front 5

What are the Liquidity ratios?

Back 5

Current ratio and acid test ratio

Front 6

What is the efficiency ratio?

Back 6

Stock turnover ratio

Front 7

What does the Gross profit percentage ratio show?

Back 7

It shows the profit made from buying and selling stock

Front 8

What is the ratio for gross profit percentage ?

Back 8

Gross profit/sales x 100 = ____%

Front 9

Why would there be an increase in the gross profit percentage?

Back 9

~selling price has been raised

~cost of sales has been lower because of cheaper suppliers have been used

~ increase in marketing activities have caused demand to increase

~ better quality product being sold compared to a competitior and this has increased sales

Front 10

Why would there be a decrease in the gross profit percentage?

Back 10

~ Cost of sales has increased

~ stock might have been lost due to waste or theft

~ fewer marketing activities might have caused demand to fall

~ fewer sales due to a better product being sold by a competitor

Front 11

What does the net profit percentage ratio show?

Back 11

Shows the profit made once expenses have been deducted

Front 12

What is the ratio for net profit percentage?

Back 12

Net profit/sales x 100 =____%

Front 13

Why would there be an increase in the net profit percentage?

Back 13

~ gross profit has been higher

~ expenses have been lower (possibly due to cheaper alternatives have been sourced)

Front 14

Why would there be a decrease in the net profit percentage?

Back 14

~ gross profit has gone down

~ expenses have increased and the organisation should look into cheaper alternatives.

Front 15

What does the return on capital employeed ratio show?

Back 15

Shows the return on capital investment made by the owner or shareholder in an organisation

Front 16

What is the return on capital employeed ratio?

Back 16

Net profit / capital employed x 100= ___%

Front 17

Why would there be an increase in the return on capital employed ratio?

Back 17

~ sales have increased

~ expenses have been lower

Front 18

Why would there be a decrease in the return on capital employed ratio?

Back 18

~ sales have decreased

~ expenses have been higher.

Front 19

What does the current ratio show?

Back 19

It shows how able an organisation is to pay its short-term debts . it would indicate if additional finace would be required to pay bills

Front 20

What is the current ratio?

Back 20

Current assets / current liabilities : 1

Front 21

What is the ideal ratio for current ratio?

Back 21

2:1

(meaning it has double the amount of current assets compared to current liabilities)

Front 22

What would be the problem if the current ratio was lower than the ideal ratio?

Back 22

The organisation could struggle to pay its short-tern debts

Front 23

What should the organisation do if their current ratio is higher than the ideal ratio?

Back 23

They should consider ways on how to decrease it to ensure that they are using its assets in the most effective way that they can

Front 24

Why would the current ratio increase?

Back 24

~ current liabillities have decreased

~ current assets have increased

Front 25

Why would the current ratio decrease?

Back 25

~ current liabilities have increased

~ current assets have decreased

Front 26

What does the Acid test ratio show?

Back 26

It shows how able an organisation is to pay its short-term debts without having ot sell its stock, this is because stock can be difficult to turn into cash quickly

Front 27

What is the Acid test ratio?

Back 27

Current assets / current liabiltes : 1

Front 28

What is considered an acceptable ratio for the acid test ratio?

Back 28

1:1

(this is because it indicates the organisation can pay its short term debts without having to rely on selling stock)

Front 29

Why would the acid test ratio increase?

Back 29

~ current liabilites have been decreased

~ current assets have increased

Front 30

Why would the acid test ratio decrease?

Back 30

~ current liabilities have increased
~ current assests have decreased

Front 31

What is the stock turnover Ratio

Back 31

It shows the length of time that stock is being held.

Front 32

What is the stock turnover ratio?

Back 32

Cost of sales / average stock = 'times'

Front 33

How do you calculate the average stock?

Back 33

Average stock = Closing stock + Opening stock / 2

Front 34

Why would there be an increase in the stock turnover ratio?

Back 34

~ increase in the cost of goods sold (eg purchases)

~ decrease in average stock holding

Front 35

Why would there be a decrease in the stock turnover ratio?

Back 35

~ decrease in the cost of good sold (eg purchases)

~ increase in average stock holding

Front 36

What are problems with ratios?

Back 36

~ hystoric figures used

~ comparisons between organisations are difficult unless they are the same size and type

~ PESTEC

~Workforce related issues are not considered

~ new product development/launches are not considered