3.5.2 Analysing financial performance

• What does financial performance measure?

  Financial health and profitability
• What does efficiency measure in financial performance?

  Use of resources
• Match the ratio category with its example:

  Profitability ↔️ Profit margin

  Liquidity ↔️ Current ratio

  Efficiency ↔️ Asset turnover
• Return on Capital Employed is calculated as Operating Profit / Capital Employed
• What does liquidity measure in financial performance?

  Ability to meet obligations
• A high ROCE suggests the business is using its capital effectively to generate returns.


  True
• What does the quick ratio exclude from current assets?

  Inventory
• A higher ratio generally indicates better liquidity
• What does the current ratio measure?

  Ability to cover liabilities
• A low debt-to-equity ratio indicates a healthy capital structure.


  True
• Match the financial ratio category with its example:

  Profitability ↔️ Profit Margin

  Liquidity ↔️ Current Ratio

  Efficiency ↔️ Asset Turnover

  Gearing ↔️ Debt-to-Equity Ratio
• A high interest coverage ratio suggests strong solvency.


  True
• What is the purpose of evaluating investment performance?

  Assess financial goals
• Steps for comparing performance with industry benchmarks:

  1️⃣ Ratio Comparison

  2️⃣ Key Performance Indicators (KPIs)

  3️⃣ Financial Statements Analysis
• Industry benchmarks reflect average performance levels within a specific sector
• Profitability measures a business's ability to generate profits
• Gearing measures a business's reliance on debt
• Analyzing financial ratios helps businesses identify areas for improvement.

  True
• What does a high Return on Capital Employed (ROCE) suggest?

  Efficient use of capital
• Profit margin is calculated as Net Profit divided by Revenue
• What does liquidity measure in a business?

  Short-term financial obligations
• A current ratio above 1 indicates sufficient assets to cover short-term liabilities.


  True
• A current ratio above 1 suggests sufficient assets to cover short-term liabilities.


  True
• Solvency refers to a business's ability to meet its long-term financial obligations
• Profitability ratios measure a business's ability to generate profits
• What is the formula for profit margin?

  $(Net Profit / Revenue) *$$100$
• What does a low debt-to-equity ratio indicate?

  Healthy capital structure
• Match the solvency ratio with its formula:

  Debt-to-Equity Ratio ↔️ Total Debt / Total Equity

  Interest Coverage Ratio ↔️ Operating Profit / Interest Expense
• Return on Investment (ROI) measures the profitability of an investment relative to its cost
• Match the method with its description:

  Ratio Comparison ↔️ Compares financial ratios like profit margins

  Key Performance Indicators (KPIs) ↔️ Tracks metrics like sales growth

  Financial Statements Analysis ↔️ Assesses statements against industry averages
• Industry benchmarks can help identify areas for improvement in a business's financial performance.


  True
• Continuously monitoring and improving performance relative to industry peers can enhance a business's competitiveness
• What is one outcome of comparing a business's performance to industry benchmarks?

  Identify areas for improvement
• Liquidity ratios measure a business's ability to meet short-term obligations.


  True
• What are two examples of profitability ratios?

  Profit margin, ROCE
• How is profit margin calculated?

  Net Profit / Revenue
• A high profit margin indicates strong pricing power and cost control.


  True
• What is the formula for Return on Capital Employed (ROCE)?

  Operating Profit / Capital Employed
• The current ratio is calculated as Current Assets divided by Current Liabilities
• If a company has current assets of $200,000 and current liabilities of $100,000, its current ratio is 2