A-Level Business: Financial Ratio Analysis—Liquidity, Profitability & ROCE

What is the difference between strategy and tactics?

Strategy involves long-term decisions, while tactics are short or medium-term decisions.

What is the value of a SWOT analysis?

SWOT analysis is a tool for strategic decision making.

Name an internal influence on functional objectives and decisions.

The amount of finance available or production capacity.

What links mission statements and corporate objectives?

Corporate objectives are based upon the ethos of the mission statement.

Name an influence on the mission of a business.

PESTLE factors, CSR, Ownership, past performance, etc.

What are current assets?

Assets to be used up within one year, such as stock or debtors.

What are current liabilities?

Liabilities that need to be paid within one year, like supplier payments.

What are non-current assets?

Items used in business for normal trading, like a van or coffee machine.

What are non-current liabilities?

Debts that need to be paid over a period longer than one year, such as loans.

How are net assets calculated?

Net assets are calculated by Total Assets minus Total Liabilities (TA - TL).

What does total equity represent?

Total equity represents the amount invested into the business.

What do liquidity ratios measure?

Liquidity ratios measure a company's ability to convert assets to cash to cover current liabilities.

What is the formula for the current ratio?

Current Ratio = Current Assets / Current Liabilities.

What is the ideal current ratio range?

The ideal current ratio is around 1.5:1 to 2:1.

What does a current ratio below 1.5:1 indicate?

It may indicate that the business does not have enough working capital to cover its bills.

What is the acid test ratio?

Acid Test = (Current Assets - Stock) / Current Liabilities.

What does the acid test ratio ignore?

The acid test ignores stock as an asset.

What is the formula for gross profit margin?

Gross Profit Margin = (Gross Profit / Sales Revenue) x 100.

What is the formula for net profit margin?

Net Profit Margin = (Net Profit / Sales Revenue) x 100.

What does the Return on Equity (ROE) ratio measure?

ROE measures the ability of a business to generate profits from shareholders' investments.

What is the formula for Return on Capital Employed (ROCE)?

ROCE = (Operating Profit / Capital Employed) x 100.

What does a high ROCE figure indicate?

A high ROCE figure indicates better profitability and efficient use of capital.

What are some limitations of ratio analysis?

Limitations include potential distortion from inflation, and external factors like economic conditions.

What does a current ratio of 2 suggest?

It suggests the business has healthy liquidity, but may indicate inefficient use of assets.

What is the significance of comparing two years of ratios?

It allows for a better assessment of trends and financial performance over time.

What is the purpose of evaluating financial ratios?

To assess the financial resources of the business and measure its performance.