Business A2 · Finance and accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
A figure in the accounts means little on its own. A ratio compares two figures, so that a business can be judged against earlier years, against competitors and against its own targets.
There are five groups. Liquidity ratios show whether short-term debts can be paid. Profitability ratios show how well revenue and capital are turned into profit. Financial efficiency ratios show how well inventory, receivables and payables are managed.
Gearing shows how much of the long-term finance is borrowed: a highly geared firm (above 50%) carries more risk because interest must be paid even in bad years. Investment ratios show the return that shareholders receive.
Students leave non-current liabilities out of capital employed, which makes ROCE too high and gearing wrong. Capital employed is shares plus reserves plus non-current liabilities.
Answer: ROCE 20%, profit margin 12%, gearing 33.3% (low geared).
Type what you are stuck on. The helper finds the explanation, worked examples and the notes to read, free and instant.
← Financial statementsInvestment appraisal →Take a Business A2 test