business

• Current assets shows the cash or the near cash available to the firm
• Current liabilities are any debts a business owes that needs to be paid back within a year
• Net current assets show the value of the company once all the current liabilities have been taken away from the assets
• Non current liabilities usually include long term loans such as long term bank loans or debentures that do not need to paid back within a year
• Equity and reserves show the money that has been invested by the owners and any profit that has been kept by the business
• Net worth adds together all the businesses equity and reserves and its net assets. This shows the overall worth of the business on the day the statement of financial position was drawn up
• Profitability ratios measure how much profit an organisation makes
• Gross profit percentage ratio works out the amount of profit from the buying and selling of goods before all other expenses are deducted
• Two ways to improve gross profit percentage ratio is:

  • Raise the selling price of the product
  • Negotiate deals with less expensive suppliers
• Profit for the year percentage works out the amount of profit made once all expenses are deducted
• Two ways to improve profit for the year percentage is:

  • Decrease expenses
  • Increase the gross profit figure
• Return on equity employed calculates how much money an investor will get back after a period of time
• Two ways to improve on equity employed is:

  • Increase sales
  • Reduce expenses
• Liquidity ratios calculate an organisations ability to tuen assets into cash in order to pay debts
• Current ratio demonstrates the firms ability to meet their short term debts
• An ideal current ratio is 2:1, if the ratio is higher e.g. 4:1 it could mean that the firm is insufficient and has too much money tied up in stock. A lower ratio e.g. 1:1 would mean that it would not be able to meet its debts quickly
• Three ways to improve current ratio is:

  • Increase current assets
  • If the ratio is too high you can sell non current assets
  • Decrease current liabilities
• Acid test ratio is a more severe test of the firms capabilities to meet its debts.
• An ideal value for the acid test ratio is 1:1
• (Efficiency ratios) Rate of inventory turnover determines how quickly a firm goes through its stock
• The purpose of ratio analysis is:

  • Help compare current performance with previous records
  • Help compare firms performance with similar competitors
  • Help with future decision making
• Limitations of ratio analysis is:

  • Can only be used for comparison with firms the same size and type
  • May be difficult to compare with businesses as they may not be willing to share the information
  • Does not take into account external factors such as worldwide recession
• Non current assets show the current value of major purchases that help in the running of the business