3.7.2 - financial ratios

Question 1

what does a balance sheet show?

Answer 1

• value of the business (assets vs liabilities + equity)

Question 2

what does an income statement show?

Answer 2

profitability over the year

Question 3

what is meant by ‘benchmarking against best-in-class business’?

Answer 3

comparing performance of other businesses not in competition to help set standards of successful structures

Question 4

how do you calculate ROCE?

Answer 4

capital employed = operating profit/capital employed x 100

Question 5

what is ROCE?

Answer 5

• a good gauge of profits generated from capital investment

Question 6

what are two features of ROCE?

Answer 6

• tends to be more useful in more large and important capital invested business
• doesn’t consider other functional factors or market value of assets

Question 7

how do you calculate current ratio?

Answer 7

current ratio = current assets/current liabilities

Question 8

what is one advantage of calculating current ratio?

Answer 8

it is good for assessing ability to pay short term finances

Question 9

what are two disadvantages of current ratio?

Answer 9

• unreliable due to current assets and liabilities being subject to regular change
• dependant on accurate valuation of stock and turnover expectation

Question 10

what is meant by high gearing?

Answer 10

• more debt than equity on capital employed

Question 11

what is inventory turnover?

Answer 11

how long stock is held for (if held for long then it is low)

Question 12

how is historical data a limitation for financial performance indicators?

Answer 12

sources can be unreliable as laws change and may not fit modern day

Question 13

how is internal perspective a limit on financial performance indicators?

Answer 13

it limits a full outlook on businesses including external factors