2415119
Description
Flashcards by barbare.rukhadze, updated more than 1 year ago
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Created by barbare.rukhadze
about 9 years ago
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| Question | Answer |
| Ratio analysis | A technique for analysing a business's financial performance by comparing one piece of accounting information into another |
| Types of ratios | * Profitability * Financial efficiency * liquidity and gearing * Shareholders ratios |
| Profitability ratios | net profit margin- this ratio measures relationship between the net profit and the level of turnover on sales made {F} Net Profit margin= net profit/revenue X 100 ROCE - also called the primary ratio and it measure the efficiency of the business in using its capital to generate profits {F} ROCE= operating profit/total capital employed X 100 * higher the figure for these ratios the better |
| Financial efficiency ratios | Asset turnover= revenue/net assets employed this measures the efficiency at which the business makes use of its assets Inventory (stock) turnover- cost of goods sold/average inventories Inventory turnover= average inventories X 365/cost of goods sold Average inventories= (opening inventories+closing inventories)/2 |
| Receivables collection period | receivables collection period=receivables X 365/ revenue (expressed as days) |
| Payables collection period | Payables collection period= payables X 365/ revenue (expressed as days) |
| Liquidity ratios | Current ratio acid test ratio gearing |
| Current ratio | Current ratio= current assets : current liabilities (A firm wants to operate at 2:1) |
| Acid test ratio | Acid test= liquid assets (current assets-inventories): current liabilities (a normal ratio might be between 0,6:1 and 1,1:1) |
| Gearing | Gearing measures the proportion of capital employed by the business that is provided by long-term lenders against the proportion that has been invested by the owners {F} Gearing=non-current liabilities/total capital employed X 100 |
| Shareholders Ratios | Dividend per share (DPS) Dividend Yield |
| Dividend per share | This ratio is the total dividend declared by a company divided by number of shares the business has issued {F} DPS= total dividends/number of total shares |
| Dividend yield | This is the dividend per share (for the entire year) expressed as a percentage of the market price of the share {F} Dividend yield = dividend per share/market share price X 100 |
| Drawbacks of the ratio analysis | * It is retrospective - concentrates on past performance and is not forward looking * Different companies might use different accounting policies *Provides no information about non-financial matters such as state of the market, the morale of the workforce *It doesnt take into account the effect inflation may have on reported figures |
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