LC BUSINESS RATIO ANAYLSIS

REBECCA OMOSEBI'S RATIO ANALYSIS

name the 3 headings businesses are assessed by

• profitability

• liquidity

• gearing

name the 3 profitability ratios/formulae

• gross profit margin

• net profit margin

• return on investment

write the GROSS profit margin FORMULA

gross profit/sales x 100/1

write the NET profit margin FORMULA

net profit/sales x 100/1

write the RETURN ON INVESTMENT profit margin FORMULA

net profit/capital employed x 100/1

name the 2 liquidity ratios/formulae

• current ratio

• acid test ratio

write the CURRENT RATIO FORMULA

current assets:current liabilities

write the ACID TEST RATIO FORMULA

current assests-closing stock:current liabilities

name the gearing ratio/formula

debt/equity ratio

write the DEBIT/EQUITY RATIO

debt capital:equity capital

name 4 ways a business can overcome liquid problems

• credit control

• stock control

• raise finance

• financial planning

name 3 problems faced by highly geared business

• dividends

• extra debt and equity finance

• management stress

gross profit margin: what are the 2 REASONS the ratio asked is IMPROVING

• cost of sales has fallen

• selling price has fallen

gross profit margin: what is the SOLUTION the ratio asked to IMPROVING

continue as is

gross profit margin: what is the 2 REASONS the ratio asked is DISIMPROVING

• cost of sale has risen

• selling price has fallen

gross profit margin: what is the 2 SOLUTIONS the ratio asked is DISIMPROVING

• find a cheaper supplier

• charge a higher selling price

net profit margin: what is the 2 REASONS the ratio asked is IMPROVING

• business expenses have decreased

• gross profit % has improved

net profit margin: what is The SOLUTION the ratio asked is IMPROVING

continue as is

net profit margin: what is the 2 REASONS the ratio asked is DISIMPROVING

• expenses have risen

• gross profit % has disimproved

net profit margin: what is the 2 SOLUTION the ratio asked is DISIMPROVING

• reduce expenses

• charge a higher selling price

return on investment: what is the REASON the ratio asked is IMPROVING

increasing net profit generated from capital investment

return on investment: what is the SOLUTION the ratio asked is IMPROVING

continue as is

return on investment: what is the REASON the ratio asked is DISIMPROVING

lower net profit generated from capital invested

return on investment: what is the SOLUTION the ratio asked is DISIMPROVING

put business resources to more efficient uses

current ratio/acid test ratio: what are the 2 REASONS these ratios asked are IMPROVING

• business is better at managing cash flow

• stock control and payment of debts

current ratio/acid test ratio: what is the SHARED SOLUTION to these ratios asked are IMPROVING

continue as is

current ratio/acid test ratio: what are the 2 SHARED REASONS these ratios asked are DISIMPROVING

• increased overdraft

• increased use of creditors as a form of finance

current ratio/acid test ratio: what is the SHARED SOLUTION these ratios asked are DISIMPROVING

sell non-core fixed assets (e.g investments) to generate cash

gearing: what ARE the 2 REASONS the ratio asked is IMPROVING

• loans have been repaid

• new funds raised from shareholders

gearing: what are the 2 SOLUTIONS the ratio asked is IMPROVING

• continue to pay off loans

• use more equity capital

gearing: what is the REASON the ratio asked is DISIMPROVING

• now loans have been taken out

gearing: what are the 2 SOLUTIONS the ratio asked is DISIMPROVING

• raise new equity capital

• sell non core fixed assets to repay loans

name 4 limitations of ratio analysis

• industrial relations

• ethical behaviour

• past performance

• non-financial information

limitations of ratio analysis: STATE EXPLAIN industrial relation

ratios do not show if there are poor industrial relation in a firm

limitations of ratio analysis: STATE EXPLAIN unethical behavior

ratios do not show if the business is acting sustainably or ethically e.g shien

limitations of ratio analysis: STATE EXPLAIN past performance

ratios do not indicate what the future holds

limitations of ratio analysis: STATE EXPLAIN non-financial information

this can be excluded from financial analysis e.g. staff morale