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3.7 analysing strategic position
3.7.2 ratios
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Grace Ashwell
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Cards (14)
what is a liquidity ratio?
assess whether a business has sufficient
cash
or equivalent
current
assets to be able to pay its
debts
as they fall due
what are the liquidity ratios?
current
ratio
what is gearing?
measures the
proportion
of business'
finance
provided by
debt
Why is the gearing ratio useful?
Measures
financial health
of business, focuses on level of
debt
, high gearing means business risk
What is the capital structure of a business?
equity
(share
capital
, retained profits),
debt
(bank
loans
)
evaluating gearing
Gearing
of
50%
+ is high, gearing of less than
20
% is
low
, level of acceptable gearing depends on business and
industry
benefits of high gearing
Less
capital
required to be invested by the
shareholders
Debt
can be a relatively cheap source of finance compared with
dividends
Easy to pay
interest
if profits and
cash flows
are strong
benefits of low gearing
Less
risk of defaulting on
debts
Shareholders rather than
debt providers
“call the shots”
Business has the
capacity
to add debt if required
what does efficiency ratios measure?
analyse how effectively a business is
managing
its
assets
What are the three key efficiency ratios?
inventory
turnover,
payable
days,
receivable
days
What
is inventory turnover?
measures how often a year a business sells and replaces its
inventory
What is receivable days?
the average length of
time
taken by customers to
pay
amounts
owed
what
is payable days?
the average length of
time
taken by a business to
pay
amounts it
owes
What
are the profitability ratios?
GPM
,
OPM
,
ROCE
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