HBM - Ratio Analysis

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It is sometimes hard to ​

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different organisations' performance, or even the same firm's performance over the ​

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. One method used by businesses to compare their performance is ​​

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.

Multiple Select

What is the purpose/use of Ratio Analysis?

(Choose all that apply)

• compare with previous years

• compare against competitors

• identify when additional finance may be required due to deficit

• highlight trends for future decision making

• may not be useful due to historical data being used

Match

Match the following

• Information is historic

• Ratios don't take into account external factors

• Difficult to find competitors of exact type/size

• Does not take into account new products being produced

• Ratio analysis does not measure the human element of a firm

so not relevant to current position

eg, recession, changes in legislation

in order to make valid comparisions

or the stage of the product life cycle

eg, low staff morale, industrial action

• so not relevant to current position

• eg, recession, changes in legislation

• in order to make valid comparisions

• or the stage of the product life cycle

• eg, low staff morale, industrial action

Multiple Choice

Ratio analysis covers three areas:

• • profitability

  • liquidity

  • efficiency

• cash budgets

  income statements

  statement of financial position

• assets

  liabilities

  working capital

• profits

  losses

  breakeven

• gross profit %

  current ratio

  rate of inventory turnover

Multiple Choice

Gross Profit % =

• (Gross Profit/Sales Revenue) x 100

• (Sales Revenue/Gross Profit) x 100

• (Gross Profit - Sales Revenue) x 100

• (Sales Revenue - Gross Profit) x 100

• (Gross Profit + Sales Revenue) x 100

Multiple Select

How to improve gross profit % figure?

(choose all correct answer)

• Increase sales revenue

• Decrease expenses - don't allow staff overtime

• Decrease sales volume
• Find a cheaper supplier

• Decrease sales revenue

Multiple Select

How to improve profit for the year % figure?

(choose all correct answer)

• Increase sales revenue

• Decrease expenses - don't allow staff overtime

• Decrease sales volume
• Increase current assets in the business

• Decrease sales revenue

Multiple Choice

Profit for the Year % =

• (PftY/Sales Revenue) x 100

• (Sales Revenue/PftY) x 100

• (PftY - Sales Revenue) x 100

• (Sales Revenue - PftY) x 100

• (PftY + Gross Profit) x 100

Multiple Select

How to improve return on equity employed figure?

(choose all correct answer)

• Increase sales revenue

• Decrease expenses - don't allow staff overtime

• Decrease sales volume
• Increase current assets in the business

• Decrease sales revenue

Multiple Choice

Return on Equity Employed =

• (Profit for the Year/Equity) x 100

• (Equity/Profit for the Year) x 100

• (Equity - Profit for the Year) x 100

• (Equity - Profit for the Year) x 100

• (Gross Profit/Equity) x 100

ROEE

A reduction in ROEE could simply mean that more shares were issued - smaller slices of cake for more people!

Drag and Drop

A reduction in return on ​

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employed could simply mean that more ​

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were issued - smaller slices of cake for ​

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people!

Drag these tiles and drop them in the correct blank above

equity

assets

profit

shares

sales

more

less

the same amount of

products

Multiple Select

How to improve current ratio?

(choose all that apply)

• Invest some current assets if too high

• Increase sales and reduce expenses

• Arrange a bank loan/overdraft

• Increase current assets or decrease current liabilities
• Decrease current assets or increase current liabilities

Multiple Choice

Current Ratio =

• current assets/current liabilities : 1

• current liabilities/current assets : 1

• (current assets - closing inventory)/current liabilities : 1

• (current liabilities - closing inventory)/current assets : 1

• current assets/current liabilities x 100

Multiple Select

How to improve Acid Test Ratio result?

(choose all that apply)

• Implement JIT

• Reduce expenses, eg electricity and rent

• Increase sales figure

• Increase current assets or decrease current liabilities

• Increase current assets and increase current liabilities

Multiple Choice

Acid Test Ratio =

• current assets/current liabilities : 1

• current liabilities/current assets : 1

• (current assets - closing inventory)/current liabilities : 1

• (current liabilities - closing inventory)/current assets : 1

• (current assets - closing inventory)/current liabilities x 100

Multiple Choice

Rate of inventory turnover =

• Gross Profit /Average Inventory

• Sales / Average Inventory
• Cost of Goods Sold / Average Inventory
• Cost of Goods Sold / Closing Inventory

• Cost of Goods Sold / Opening Inventory

Multiple Choice

How to work out average inventory?

• (Opening Inventory - Closing Inventory) / 2

• (Opening Inventory - Sales) / 2

• (Opening Inventory - Closing Inventory) / 2

• (Opening Inventory + Closing Inventory) / 2

• (Suppliers - Sales)/ 2

Dropdown

​

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is ​

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ratio which determines how quickly a firm goes through its ​

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.

A ​

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inventory turnover is preferable as this means inventory is selling – marketing and purchasing are doing their jobs properly!

If inventory turnover is low then this means inventory is not being bought and there may be many reasons such as:

poor quality of goods

poor customer service

poor ​

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Categorize

Options (6)

Gross profit %

Profit for the Year %

Return on equity employed

Current ratio

Acid test ratio

Rate of inventory turnover

Organise these options into the right categories

Profitability Ratios

Liquidity Ratios

Efficiency Ratios

Multiple Choice

Explain the limitations of using accounting ratios.

1 mark

• New products could just have been launched and again these may improve performance although ratios will not show this.

• Ratios can only be used to compare against similar organisations in similar industries to be effective.

• Information is historical

• Ratios allow the company to ompare current performance with firm’s previous years which can help with decision making eg, do we need to improve our gross profit figure