BUSS3 - INTERPRETING PUBLISHED ACCOUNTS
- Created by: thatgirlonfire
- Created on: 01-06-16 12:22
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Evaluating return on capital employed (ROCE):
ROCE (%) = Operating profit / Capital employed x 100
- Higher % is better
- Look for a trend overtime
- Low quality profits boosts ROCE
- Leased equipment is not included in ROCE
Evaluating liquidity ratios:
Current Ratio
- Interpreting results
- A ratio of 1.5+ suggests efficient management of working capital
- A low ratio of below 1 indicates cash problems
- A high ratio means there is too much working capital
- Look out for
- Industry normalities (e.g. supermarkets work with low current ratios due to low debtors)
- Trend in ratio (e.g. changes in ratio) are most important to look out for
Acid Test Ratio
- Current adjusted for stocks
- Considered a better way to measure liquidity, especially for business that carry a lot of stock
- Focuses on the assets that a business can quickly turn into cash
- Important to look out for changes like a significant fall in ratio, which indicates a serious problem
Profit Quality - whether the reported…
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