Financial Ratio

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  • Created by: Dan
  • Created on: 19-12-12 13:37

Current Ratios

Measures the ability of a business to meet its liabilities.

                                      Current assets

Current Ratios =    -------------------------------------------

                                      Current Liabilites

It is a ratio to calculate the amount of current assets to current liabilities. It shows how well a business will be able to meet its current debts if they were all called in at once without selling off any of their non-current assets.

A common figure would be 1.6:1 Meaning that when the debts are called in the business will be able to pay them off and have money left over to maintain flexibility.

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Acid Test Ratio

This ratio measures the short term liquidity of a business. It provides a better indicator than the current ratio on liquidity as the only assets considered are liquid.

                                              Current Assets

Acid test ratio = ---------------------------------------------------------------------

                                             Current Liabilities

A business aims for an acid test ratio of 0.7:1. A business should not operate with a high Acid Test Ratio, as holding assets in the form of cash is not profitable.

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                     non-current liabilities x 100

Gearing =   ------------------------------------------------------

                     total equity + non-current liabilities

Measures the long term liquidity of the business and the amount of a businesses funds raised through non-current liabilities.A highly geared business has a percentage of over 50%, and a low geared business has a percentage lower than 50%.

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Asset Turnover Ratio

Measures a business' sales in relation to the assets used to generate these sales.

                                            Revenue (turnover)

Asset turnover = ---------------------------------------------------------------------

                                                  Net Assets

It is the efficiency with which a business uses it assets

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