Buss3 calculations

Gearing Ratio

• This measures the proportion of long term capital that is borrowed.
• It therefore helps to measure long-term solvency.
• A sensible target figure would be between 25% and 50%.
• Above 50% is dangerous as it means thy have borrowed too much money.
• Below 25% can be regarded as too low as it can mean the business is relying too much on shareholders and retained profits.

Shareholders Ratios

• Shareholders want high dividends and the share price to increase
• Dividend per share needs to be compared with share price to be useful to the business and the shareholder.
• The % yield should be compared with the % yield of other shares and with bank interest rates yo assess whether it is worth buying, holding or selling shares.

Liquidity Ratios

Current Ratio

• The ideal current ratio would be between 1.5:1 and 2:1
• e.g. the business has between £1.50-£2.00 of current assets for every £1 of current liabilities.
• If the ratio is too high it is bas because the business has too many current assets.

Acid Test Ratio

• The ideal acid test ratio is between 0.75:1 and 1:1.
• If the figure is too low they will run out of cash
• If the figure is too high they have too much cash which is not earning profit.

Profitability Ratios

Return on capital employed

• This indicates the sixe of the business
• It shows how well the firm are doing in terms of profit.
• Business wants as high ROCE as possible.
• Doesn't include exceptional item.

Financial Efficiency Ratios

• Businesses want a high asset turnover to maximize sales. Capital intensive businesses may have relatively low asset turnover because it has a lot of fixed assets.
• Inventory turnover- shows how many times a year a business sells its stock. The higher the better as cash flows in quicker.
• Receivable days (Debtor)- A business will want a low number of days so that they can get cash in quicker. In some industries it is important to offer customer trade credit for up to 90 days…