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14 Cards in this Set
- Front
- Back
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what is acid test ratio used for? what is an ideal ratio?
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acid test ratio compares current assets (excluding stock) to current liabilities, written as x:1. an ideal is 1:1. a higher amount shows they have too much money lying around that could be used. a lower number shows they do not have enough assets to pay off liabilities
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what is current ratio used for? what is an ideal ratio?
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compares current assets, incl. stock to current liabilities. ideal is 1.5:1 or 2:1. a lower value shows liquidity problems
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how can a firm improve liquidity?
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decreasing stock levels, speeding up collection of debts, or slowing down payments to creditors
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what is asset turnover ratio used for? which firms have a high ratio and which have a low?
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this shows how much revenue a firm is making from every pounds worth of its assets. maunfacturing firms will have a much higher ratio compared to service industries. a low ratio for a manufacturing firms shows inefficient use of fixed assets or too much current assets
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what's stock turnover ratio used for? how is it analysed?
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this compares the cost of all sales a business makes over a year to the average value of stock it holds.
-a fruit and veg stall or a firm using JIT production would have a very high ratio -can be improved by holding less stock (JIT) or increasing sales. |
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what is debtor days ratio for? is it better for it to be low or high?
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this is the time a firm has to wait for payment on goods it has supplied on credit.
- a low ratio is best as it helps with cash flow and working capital. -a high number shows that their debtors are too relaxed. the firm may need to consider ways to encourage faster repayment, e.g phone calls, emails etc. |
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what the creditor days ratio for? is low or high better?
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this is the time it takes for a firm to pay back their liabilities. a high number shows they have the power to pay whenever they want, or it could mean they are having problems paying their debts.
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what is gearing? what does a low or high gearing show? how does this effect the firm?
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-gearing shows potential investors where a firm's finance has come from - loans or share capital and reserves
- >50% is high gearing, meaning >50% is from loans - <50% is low gearing, meaning less than 50% is from loans. -high gearing firms will be hit harder by increase in interest rates or fall in profits. this will affect dividends to shareholders |
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what is ROCE used for?
what is ideal? what can it be compared with? |
-this shows how much money the firm has made compared to how much has been put into the business.
-a decent ratio is 20-30% -this can be compared with bank of england interest rates to analyse which will be a better place to invest money |
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what is gross profit margin for? is low or high better? how can it be improved?
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this measures the relationship between the gross profit and value of sales
-ideal depends on type of business e.g a bakery can have a low gpm -can be improved by reducing cost of sales, increasing prices, or withdrawing products with low gross profit margin |
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what is net profit margin for? is low or high good? how can it be improved?
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-this is like gross profit margin, but takes indirect costs into consideration
-high is best, but depends on type of firm -if it is low compared to gpm, this shows problems with overheads -can be improved by raising revenue or lowering cost of sales or overheads |
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what is dividend per share for? what does it show?
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-shows how much dividend a shareholder will receive from each share
-shareholders looking for short term return want highest dividend per share -shareholders looking for long term return through capital gain may be fine with a low one |
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what is dividend yield for?
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-this compares cost of shares to the dividend received.
-shareholders looking for short term return want highest dividend yield |
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what are 3 limitations of ratio analysis?
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-internal strengths/weaknesses e.q quality of staff dont appear on accounts and will not come up in ratios
-external factors - e.g market or economic environment are not taken into account -future changes e.g technology, interest rates cant be predicted and will not show up in ratios |
