Buss3 calculations

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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…


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