3.7.2 Ratios + gearing + limitations

What does the liquidity ratio show?

• How efficiently a firm is using its resources

• How much money is available to pay the bills

• The profitability of a business

• The cost of sales

What is the formula for the current ratio?

• Current assets / Current liabilities

• Cost of sales / Average stock held

• Payables / Cost of sales × 365

• Operating profit / Total equity

What does a current ratio below 1.5 suggest?

• The business is highly profitable

• The business is efficient in using its resources

• The business might struggle to meet its current liabilities

• The business has a high inventory turnover

What does the Return on Capital Employed (ROCE) ratio show?

• Liquidity of the business

• Efficiency of the business

• Profitability of the business

• Inventory turnover of the business

What is the formula for the Inventory Turnover Ratio?

• Cost of sales / Average stock held

• Payables / Cost of sales × 365

• Current assets / Current liabilities

• Operating profit / Total equity

What does the Payables Days Ratio compare?

• The amount the business owes to its creditors to the cost of the sales a business makes over the year

• The cost of sales to the average stock held

• The current assets to the current liabilities

• The operating profit to the total equity

How do you work out the current ratio?

• Receivables / Sales Revenue

• Current Assets / Current Liabilities

• Non-current Liabilities / Equity

• Sales Revenue / Receivables

What does ROCE show?

• The proportion of finance from non-current liabilities

• The efficiency of a company in generating profit from its capital

• The amount of money borrowed by a business

• The ratio of receivables to sales revenue

What does the inventory turnover ratio show?

• The number of days it takes to collect receivables

• The proportion of finance from equity

• How quickly inventory is sold and replaced over a period

• The ratio of current assets to current liabilities

Which would have the higher inventory turnover ratio, a Porsche dealership or a shoe shop?

• Porsche dealership

• Shoe shop

• Both would have the same ratio

• It depends on the location of the business