Leaving Cert Higher Level Ratio Analysis

Practice vocabulary flashcards covering profitability, liquidity, gearing, dividend policy, share price, and investment analysis ratios for Leaving Cert Higher Level Accounting.

Return on Capital Employed (R.O.C.E.)

A profitability metric calculated as $\frac{\text{Net Profit Before Interest}}{\text{Capital Employed}} \times 100$, used to evaluate how efficiently a company utilizes its resources compared to previous years, borrowing costs, and risk-free investments.

Risk-Free Investments Benchmark

A benchmark rate of $2\text{--}3\%$ (available from Banks, Building Societies, or Credit Unions) against which a company's Return on Capital Employed and Dividend Yield are evaluated.

Acid Test / Quick Ratio

A liquidity ratio calculated as $(\text{Current Assets} - \text{Closing Stock}) : \text{Current Liabilities}$, measuring the liquid assets available to cover every €1 owed in the short term.

Ideal Acid Test Ratio

A target liquidity benchmark of $1:1$, indicating sufficient liquidity to settle short-term debts as they fall due without tying up excessive capital in current assets.

Gearing Ratio

A capital structure ratio calculated as $\frac{\text{Debentures} + \text{Preference Shares}}{\text{Capital Employed}} \times 100$, indicating the proportion of long-term funding provided by fixed-interest debt versus equity.

Low Gearing

A gearing level below $50\%$, indicating that the company is funded more by equity than by debt and is subject to less risk from outside investors.

High Gearing

A gearing level above $50\%$, indicating that the company is financed more by debt than by equity and is at greater risk from outside investors.

Interest Cover

A solvency ratio calculated as $\frac{\text{Profit Before (+) Interest}}{\text{Interest}}$, expressed in times, indicating the ease with which a company can meet interest commitments to debenture holders and lenders.

Dividend Payout

A ratio calculated as $\frac{\text{DPS}}{\text{EPS}} \times 100$, measuring the percentage of available earnings paid out in dividends to ordinary shareholders, with a benchmark expectation of about $50\%$.

Dividend Cover

A ratio calculated as $\frac{\text{EPS}}{\text{DPS}}$, expressed in times, indicating how many times the dividend per share can be paid from earnings; higher figures signify that more profits are retained for expansion and debt service.

Dividend Yield

A return metric calculated as $\frac{\text{DPS}}{\text{MPS}} \times 100$, which compares the dividend paid to the current market price per share and is evaluated against risk-free rates of $2\text{--}3\%$.

Price Earnings (P/E) Ratio

An investment valuation metric calculated as $\frac{\text{Market Price per Share}}{\text{Earnings per Share}}$, representing the number of years needed to recover the market price of one ordinary share based on current earnings.

Investment Policy Analysis

The practice of comparing the original cost of investments against their current market value to evaluate whether management has made efficient or poor use of company resources.