F Ratios

Question 1

Purposes of ratio analysis

Answer 1

• Compare current years performance with previous years
• Compare performance with other companies
• Highlight areas of the business that require attention
• To aid in future decision making

Question 2

Limitations of ratio analysis

Answer 2

• The information is historical so there is not much that can be done about it
• External PESTEC factors aren’t taken into account, eg a recession
• Workforce factors aren’t taken into account, eg skills
• Only similar businesses can be compared
• Other businesses may not be willing to provide information

Question 3

What are the profitability ratios?

Answer 3

Gross profit percentage
Profit for the year percentage
Return on equity employed percentage

Question 4

What are the liquidity ratios?

Answer 4

Current ratio

Acid test ratio

Question 5

What are the efficiency ratios?

Answer 5

Rate of inventory turnover ratio

Question 6

Gross profit percentage

Answer 6

The percentage of profit made from buying and selling goods
gross profit/sales revenue x100
The higher the % the better

Question 7

How to increase gross profit percentage

Answer 7

By increasing the gross profit by

• Negotiating a better deal with suppliers
• Changing suppliers
• Increasing the price of the product
• Increasing sales by employing more marketing
• Increasing the quality of the product to increase sales

Question 8

Profit for the year percentage

Answer 8

The percentage of profit made once expenses have been deducted
Profit for the year/Sales revenue x 100
The higher the % the better

Question 9

How to increase profit for the year percentage

Answer 9

Increase gross profit by

• Changing or negotiating with suppliers
• Employing more marketing
• Improving quality
• Increase prices

Reduce expenses by

• Hiring less employees
• Negotiating better deals with utility suppliers

Question 10

Return on equity employed percentage

Answer 10

The percentage of investment that is returned to investors such as shareholders
Profit for the year/equity x 100
The higher the % the better

Question 11

How to increase ROEE percentage

Answer 11

Increase profit for the year by

• Reducing expenses
• Increasing gross profit

Question 12

Current ratio

Answer 12

Shows how able a business is to pay its short term debts. If it was too low, it would indicate additional finance would be required to pay bills. If it was too high, it would indicate some current assets would be better off be spent on other parts of the business or that too much money is tied up in stock.

current assets/current liabilities : 1

Ideal ration is 2:1

Question 13

How to increase current ratio

Answer 13

• Reduce current liabilities

- Increase current assets

Question 14

How to decrease current ratio

Answer 14

• Shift stock by marketing more

- Invest cash in other parts of business

Question 15

Acid test ratio

Answer 15

Indicates if an organisation is able to pay all its current liabilities in a crisis situation without selling inventory.
1:1 is fine
Current assets - inventory / Current liabilities

Question 16

How to increase acid test ratio

Answer 16

• Reduce current liabilities

- Increase current assets that aren’t stock (eg improving sales)

Question 17

How to decrease acid test ratio

Answer 17

• Use a JIT system to reduce cash tied in inventory
• Shift more stock by marketing more
• Invest cash into other parts of the business

Question 18

Rate of inventory turnover

Answer 18

Shows the amount of times a business restocks its inventory during the year.
Cost of sales/Average inventory
The more times the better as it indicates high sales and no overstocking

Question 19

How to improve rate of inventory turnover

Answer 19

Increasing sales by

• Increasing the quality of the product
• Improve marketing
• Improve customer service

-Use a more efficient stock management system such as JIT to hold less stock