3.5 - Assessing Competitiveness

Vocabulary flashcards focusing on financial statement interpretation, gearing and RoCE ratio analysis, qualitative limitations, human resource metrics, and employee performance strategies.

Statement of Comprehensive Income

Also known as the profit and loss account, it shows the income and expenditure of a business over a period of time—usually a year—and calculates the amount of profit made.

Statement of Financial Position

Also known as the balance sheet, it shows the financial structure of a business at a specific point in time, identifying its assets, liabilities, and capital.

Liquidity

The ability of a business to meet its short-term commitments (such as payments to creditors) with its available assets.

Gearing Ratio

A measure of the long-term financial structure of a business, calculated using the formula: $\text{Gearing Ratio} = \frac{\text{Non-Current Liabilities}}{\text{Capital Employed}} \times 100$

Capital Employed

The total long-term capital invested in a business, calculated either as non-current liabilities added to total equity, or total assets minus current liabilities.

Highly Geared Business

A business where more than $50\%$ of its capital employed comes from long-term loans, resulting in a gearing ratio greater than $50\%$ and substantial interest payment obligations.

Low Geared Business

A business where less than $50\%$ of its capital employed consists of long-term loans, resulting in a gearing ratio below $50\%$ .

Return on Capital Employed (RoCE)

Also known as the primary ratio, it measures how effectively a business generates operating profit from the capital invested, calculated as: $\text{RoCE} = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100$

Ratio Analysis

The process of extracting numerical information from financial accounts to assess business performance, support evidence-based decision-making, and compare results over time or against competitors.

Window Dressing

The legal manipulation of financial accounts to present a specific financial picture, such as revaluing property, writing off bad debts, or delaying payments to suppliers.

Labour Productivity

A measure of output per employee over a specific period of time, calculated using the formula: $\text{Labour Productivity} = \frac{\text{Total Output}}{\text{Average number of employees}}$

Labour Turnover

The proportion of employees leaving a business during a specific time period, expressed as a percentage: $\text{Labour Turnover} = \frac{\text{Number of Staff Leaving}}{\text{Average Number of Staff}} \times 100$

Labour Retention

The proportion of employees remaining with a business during a specific time period, expressed as a percentage: $\text{Labour Retention} = \frac{\text{Number of Staff Remaining}}{\text{Average Number of Staff}} \times 100$

Absenteeism Rate

The proportion of staff who were absent from work during a specific period of time, calculated as: $\text{Absenteeism Rate} = \frac{\text{Number of staff absent}}{\text{Number of staff employed}} \times 100$

Consultation

An HR strategy where managers obtain the views of employees when making decisions, helping workers feel more involved in the business.

Empowerment

An HR strategy that provides employees with autonomy and responsibility to make their own decisions, utilize their own knowledge and experience, and solve problems.

Shareholder Interest in Comprehensive Income

Focuses on profits earned, business growth, and potential dividend payments.

Employee Interest in Balance Sheet

Focuses on evaluating whether the business is financially stable, whether jobs are at risk, senior executive pay, and total tax paid.

Supplier Interest in Balance Sheet

Focuses on judging the solvency of the business to determine the financial risk involved when offering trade credit.

Manager Interest in Balance Sheet

Focuses on evaluating the working capital position to ensure liquid current assets cover short-term bills and deciding whether to raise capital via borrowing or share issue.

Steps to Reduce Gearing

Actions a highly geared firm can take to lower its gearing ratio, including issuing more ordinary shares, retaining more profits, or repaying existing loans.

Steps to Increase Gearing

Actions a low-geared firm can take to raise its gearing ratio, including buying back ordinary shares, issuing preference shares, or obtaining additional loans.

Benchmark RoCE Level

A RoCE level of at least $20\%$ is generally considered a good indicator that a company is in a solid financial position.

Causes of High Labour Turnover

Internal factors such as poor management, ineffective recruitment, or low wages, as well as external factors like a buoyant local economy or improved regional transport links.

Financial Rewards

HR performance incentives including increased pay rates, profit-sharing schemes, bonuses, commissions, performance-related pay, attendance rewards, and loyalty bonuses.

Cost of Sales

A line item on the statement of comprehensive income subtracted from revenue to determine gross profit.

Operating Profit

The earnings of a business before interest and taxes are deducted, taken from the statement of comprehensive income to calculate RoCE.

Current Assets

Short-term assets listed on the statement of financial position—such as inventory and trade receivables—that are expected to be converted into cash within a year.

Non-Current Liabilities

Long-term financial obligations owed by a business, such as bank loans, listed on the statement of financial position.

Trade Receivables

Amounts owed to a business by customers who purchased goods or services on credit, categorized as current assets.

Trade Payables

Amounts owed by a business to suppliers for goods or services bought on credit, categorized as current liabilities.

Snapshot Limitation of Balance Sheet

Because the balance sheet is a snapshot at a single point in time, it may become invalid almost immediately if major purchases, sales of stock, or property acquisitions occur right after.

Qualitative Information Limitation

A drawback of ratio analysis where non-numerical factors—such as the collapse of a competitor or changes in economic conditions—are ignored by financial calculations.

Share Ownership Strategy

Offering employees or senior executives shares in the business to provide a financial stake in its success, thereby increasing effort and commitment while reducing absenteeism.

Working Capital

A key measure of short-term liquidity evaluated by stakeholders using current assets and current liabilities on the statement of financial position.