Analysing financial performance- definitions

Balance sheet

Is a statement of a business’s assets (what a business owns) and liabilities (what a business owes) at a specific point in time. It shows how much a business is worth

Working capital

Looks at whether the business can pay its short term debts. It is also called net current assets

What are the main causes of working capital problems include:

• Poor control of stocks

• Poor control of trade debtor

• Ineffective use of trade creditor

• Poor cash flow forecasting

• Unexpected events

Net assets

Is how much a business is worth. It is worked out by subtracting the liabilities from the assets.

Capital employed

Capital employed refers to the money invested into the business- it includes the shareholder funds and capital recieved from long term liabilities

Gross profit

The difference between revenue and cost of sales. Gross profit is an indicator of how efficient the business is at making and selling its product. It can be used to calculate gross profit margin.

Corporation tax

Limited companies will be required to pay tax on the net profit of the business makes. This tax is paid to the government

What does Net profit analyse?

This is a true indicator of profit and the efficiency of a business. If this is increasing or decreasing, then the reasons to be addressed and the importance discussed.

Current ratio

this ratio considers all the current assets and how much the business currently has in order to pay its short-term debts

Acid test ratio

This ratio takes into account the stock as it is harder to turn stock into cash compared to other current assets. So it looks at how easily the business can pay its current liabilities using its current assets (but not stock)

Gearing

Shows the percentage of a firms capital that is financed by long-term loans

ROCE

Measures how effectively the capital invested in the business is being used to create profits

Net profit

Net profit is the left over after all costs have been taken away from sales revenue. Net profit measures how effective the bjusiness is at managing its total costs