387174
Description
Mind Map by chris.alchin, updated more than 1 year ago
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Created by chris.alchin
over 12 years ago
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Business
Ratios
- Liquidity -
whether firm able
to meet
short-term
liabilities (solvecy)
- Current ratio
- This is a simple measure that
estimates whether the business can
pay debts due within one year out of
the current assets. A ratio of less than
one is often a cause for concern,
particularly if it persists for any length
of time.
- Should be noted that there should be maximum as well as
minimum as too many current assets is opportunity cost for
non-current to produce goods
- This is a simple measure that
estimates whether the business can
pay debts due within one year out of
the current assets. A ratio of less than
one is often a cause for concern,
particularly if it persists for any length
of time.
- Acid test
- Used as an alternative to current ratio as firms cannot be
sure if inventories will sell, and not all current assets can be
turned into cash quickly
- Need to take into consideration the value of inventories that a firm would
need to hold for example supermarkets/solicitors. Find an industry average as
low figure may not indicate solvecy
- Used as an alternative to current ratio as firms cannot be
sure if inventories will sell, and not all current assets can be
turned into cash quickly
- Current ratio
- Financial
efficiency -
management of
firms working
capital and
assets/liabilities
- Gearing - focuses on
liquidity and
capital structure
- Measures the proportion of
assets invested in a
business that are financed
by long-term borrowing.
- Measures the proportion of
assets invested in a
business that are financed
by long-term borrowing.
- Profitability - compare
profits with size of firm -
performance ratios
- ROCE
- Shows the operating
profit as a
percentage of capital
employed
- With ROCE, the higher the percentage figure,
the better. The figure needs to be compared
with the ROCE from previous years to see if
there is a trend of ROCE rising or falling.
- To improve its ROCE a business can try to do
two things: •Improve the top line (i.e. increase
operating profit) without a corresponding increase
in capital employed, or •Maintain operating profit
but reduce the value of capital employed
- Shows the operating
profit as a
percentage of capital
employed
- ROCE
- Shareholders
- financial
benefit
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