Ratios Revision Unit 4 1 2 1
Ratios Revision Unit 4 1 2 1
Ratios Revision Unit 4 1 2 1
Profitable Liquid
Balance sheet
Financed By
Ordinary Share Capital xxx
Preference Shares xxx
Retained Earnings/Reserves xxx
Long Term Loans +xxx
Capital Employed xxx
Importance of Balance Sheet
• Shows Fixed Assets – assets/items that business owns that last a number of years eg.
buildings, equipment
• Shows Current Assets – Items business owns that will keep for less than 1 year eg.
debtors, stock
• Shows Current Liabilities – money owed by business that has to be repaid within 1 year
eg. creditors, bank overdraft
• Shows Working Capital – difference between Current Assets & Current Liabilities –
shows cash left over to pay incoming bills
Importance of Balance Sheet
• Shows Financed By – amount invested by investors (shares & loans)
• Shows Ordinary Share Capital/Equity Capital – money shareholders invested – 1 share = 1 vote at
meetings & entitles shareholders dividends
• Shows Preference Shares – money shareholders invested with guaranteed payment of dividends
before other shareholders – no vote at meetings
• Shows Long Term Loans – money borrowed that bus has more than 1 year to repay
Importance of Balance Sheet
Shows Fixed Assets
•NB because: → tells managers if business has security/collateral to apply for loans
- Answer is written as %
- What it means: If Gross Profit Percentage = 20%, it means that 20% of the
money from customer sales is business’s profit – but this is profit level
before bills have been paid
Analysis of Gross Profit Percentage
• State whether the percentage is increasing /decreasing & results of percentage
calculations
- Answer is written as %
- What it means: If Net Profit Percentage = 20%, it means that 20% of the
money from customer sales is actual business’s profit – this is the real
profit level because it’s after bills have been paid
Analysis of Net Profit Percentage
• State whether the percentage is increasing /decreasing & results of percentage calculations
- Answer is written as %
- What it means: If Return on Investment = 10%, it means that the
business made 10 cent profit on every €1 invested
- Capital Employed = Equity (Ordinary) Share Capital + Retained
Earnings (Reserves) + Long Term Loans + Preference Shares
Analysis of Return on Investment
• State whether the percentage is increasing /decreasing & results of percentage
calculations
If ROI is Decreasing:
• What it Means: Shows managers inefficient at turning resources into profit
• How to Improve: Must make cutbacks/ hire more efficient managers/ reduce expenses/
use resources more efficiently
• User: Investors → to see ROI, if business is good investment
If ROI is Increasing:
• What it Means: Shows managers efficient at turning resources into profit
2. Liquidity Ratios
Liquidity
→ shows if the business has enough cash to pay its short term bills
• Answer is written as __ : 1
• What it means: identifies how much money business has for every €1 it owes →
shows if the business has enough cash to pay its day-to-day bills
• Ideal ratio is 2:1 → if less than this the business is illiquid
Analysis of Working Capital Ratio
• State whether the ratio is increasing /decreasing & results of ratio calculations
• Answer written as __ : 1
• What it means: Shows how much real cash business has → current
stock in factory left out because it may not be turned into cash
quickly in emergency situation
• Ideal ratio is 1:1 → if less than this the business is illiquid
Analysis of Acid Test Ratio
• State whether the ratio is increasing /decreasing & results of ratio calculations
Credit control
Stock control
Raise finance
Financial planning
3. Gearing
Debt Equity Ratio =
Long Term Debt + : Equity (Ordinary) Shares
Preference Shares + Retained Earnings (Reserves)
• What it means: Shows how the business is financed ie. how much was
borrowed and how much was invested
• No ideal ratio → __: 1
• Business can be High Gearing, Low Gearing or Neutral Gearing
Analysis of Debt Equity Ratio
• State whether the ratio is increasing /decreasing & results of ratio calculations
• State the 3 levels of gearing and which gearing applies to each year
Suppliers
Employees Competitors
(creditors)
Government
Limitations of Ratio Analysis
• Ratios do not show if there are poor industrial relations
Industrial relations
in a firm.