Finance

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What are the 2 types of liquidity ratios?
Current ratio and Acid test ratio
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What are the 3 types of profitability ratio?
Return on Capital Employed, gross profit margin and net profit margin
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What does it mean if a business is solvent?
It has enough working capital to fund its day to day expenses
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What is the formula for the current ratio?
Current assets / current liabilities
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What does current ratio show?
the relationship between the firms current assets and its current liabilities
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What is the 'safe' current ratio?
between 1: 1.5 and 2:1
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What does it mean if the current ratio is lower than 1?
The business is in danger of running out of cash
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What does it mean if the current ratio is higher than 1.5?
The business has too much cash
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What doesn't the Acid test ratio include unlike the current ratio?
Stock
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What can cause problems for a business?
If most of the working capital is in the form of stock rather than cash
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Why is it a problem for a business?
If a vital piece of equipment breaks down the business may only be able to pay for the repair if the stock could be sold immediately
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What is the formula for the acid test ratio?
current assets - stock / current liabilities
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What is the ideal figure for the acid test ratio?
Between 1 and 1.5
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What does it suggest if the acid ratio is too high?
The business is holding too many current assets and may be better if they invest the cash or use it to pay off loans
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What happens if the ratio is too high?
The business is holding too many current assets and it may be better investing the cash or using it to pay off loans
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What does gross profit margin help a business understand?
How and why it earned the profit it did
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What does gross profit margin show managers and investors?
the types of costs the business has had to pay and how much profit was left over from sales revenue
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what is the formula for gross profit margin?
Gross profit / sales revenus x 100
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What is the gross profit margin usually a good indicator of?
Shows how much of the money received from sales is actual gross profit
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What doesn't the gross profit include?
Operating expenses (overheads)
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Why can net profit margins be more important?
Takes all costs into account
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What is the net profit formula?
Net profit / sales revenue x 100
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What is the formula for ROCE?
Operating profit / capital employed x 100
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What does the ROCE do?
Expresses the annual percentage return that an investor would receive on their capital
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What is the gearing ratio?
It looks at the capital structure of a business eq how it is financed
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What is the equation for gearing ratio?
non-current liabilities (long term) / total equity + non current liabilities x 100
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What does the gearing ratio measure?
The percentage of capital employed that is financed by borrowing compared to internal sources such as share capital
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What does it mean if the gearing ratio is greated than 50%?
the business has high capital gearing
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What is a benefit of high capital gearing?
Share holder divends are usually higher than interest
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What is a benefit of low capital gearing?
Avoids the problem of paying high levels of interest on borrowed capital when interest rates are high
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What does it mean if the gearing ratio is lower than 25%?
the business is said to have low capital gearing
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Other cards in this set

Card 2

Front

What are the 3 types of profitability ratio?

Back

Return on Capital Employed, gross profit margin and net profit margin

Card 3

Front

What does it mean if a business is solvent?

Back

Preview of the front of card 3

Card 4

Front

What is the formula for the current ratio?

Back

Preview of the front of card 4

Card 5

Front

What does current ratio show?

Back

Preview of the front of card 5
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