3.7.2 Analysing the existing internal position of a business to assess strengths and weaknesses : financial ratio analysis

What are current assets?

assets that are meant to be used up in a year e.g stocks 

What are current liabilities?

things that need to be paid for in a year e.g paying a supplier for stock

What are non-current assets?

items used in the business for normal training e.g a transport lorry, a coffee machine in a coffee shop, lash tweezers at a lash tech’s studio

What are non-current liabilities?

debts that need to be paid in a period longer than a year e.g a loan

What is total equity?

should match net assets (it's the amount invested into a business)

What is ROCE?

Return on Capital Employed

What does gearing mean?

how much of a business’ money comes from borrowing rather than the owners own money

What does high gearing ratio mean for a business?

>50% that the business owes a lot of money e.g if you bought a car from a loan and payed 10% out of pocket, you’d be heavily geared

What does low gearing ratio mean for a business?

<50% that the business mainly uses their own money, less reliant on loans

What does a change in gearing ratio do?

makes shareholders uncertain, because why’s the business randomly borrowing money

What are payables?

money a business owes to its suppliers for goods or services bought on credit

What are high payable days and what impact do they have?

how long it takes for a business to pay a supplier back and they are

• good for liquidity

• bad for supplier relationships 

• strong cash flow

What is liquidity?

how easily a company can pay what it owes soon using the money or things it can quickly turn into money; the more cash (or quick-to-sell stuff) it has, the liquid it is.

What are the impacts of low payable days?

• strengthens supplier relationships

• less cash available 

• weak cash flow 

• competitors may have more cash to invest while you don’t 

What are the impacts of high receivable days?

• USP of offering long term credit

• poor cash flow 

• risk of customers never paying means bad debt 

What are the impacts of high receivable days?

• strong cash flow 

• lower risk of bad debts 

• competitors may offer long term credit 

• if too strict can discourage customers