- 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 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.
- 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.
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…
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