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Higher Business Management > F Ratios > Flashcards

Flashcards in F Ratios Deck (19)
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1
Q

Purposes of ratio analysis

A
  • 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
2
Q

Limitations of ratio analysis

A
  • 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
3
Q

What are the profitability ratios?

A

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

4
Q

What are the liquidity ratios?

A

Current ratio

Acid test ratio

5
Q

What are the efficiency ratios?

A

Rate of inventory turnover ratio

6
Q

Gross profit percentage

A

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

7
Q

How to increase gross profit percentage

A

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
8
Q

Profit for the year percentage

A

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

9
Q

How to increase profit for the year percentage

A

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
10
Q

Return on equity employed percentage

A

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

11
Q

How to increase ROEE percentage

A

Increase profit for the year by

  • Reducing expenses
  • Increasing gross profit
12
Q

Current ratio

A

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

13
Q

How to increase current ratio

A
  • Reduce current liabilities

- Increase current assets

14
Q

How to decrease current ratio

A
  • Shift stock by marketing more

- Invest cash in other parts of business

15
Q

Acid test ratio

A

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

16
Q

How to increase acid test ratio

A
  • Reduce current liabilities

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

17
Q

How to decrease acid test ratio

A
  • Use a JIT system to reduce cash tied in inventory
  • Shift more stock by marketing more
  • Invest cash into other parts of the business
18
Q

Rate of inventory turnover

A

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

19
Q

How to improve rate of inventory turnover

A

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