18 Questions
What is the formula for calculating gearing as explained in the text?
Bank overdraft divided by capital employed
How is operational gearing defined in the text?
The relationship between fixed and variable costs in a business
What is the significance of assessing future profitability according to the text?
Evaluating the likelihood of continued profit generation and debt repayment capacity
In Example 2.1, what is the calculated gearing percentage for the company?
48.5%
What does operational gearing help determine according to the text?
The likelihood of profitability and debt repayment capacity
Based on the text, what is a key determinant of future profitability?
Ratio of fixed to variable costs
What is the main reason why post-balance sheet deterioration in ratios based on normalised pricing would go unnoticed by external analysts?
The post-balance sheet deterioration is not immediately visible.
Why is consistency in financial reporting over time considered a positive indicator?
It suggests reliable management and professional advisers.
What is the primary purpose of tracking key accounting ratios alongside breakeven and cash flow analysis?
To provide a more balanced view of business performance patterns and trends.
Why do businesses rely on terms of credit to purchase stock?
To facilitate the trading cycle through various steps.
What do working capital ratios primarily indicate about a business?
Ability to manage day-to-day operations.
How can accurate tracking of accounting ratios benefit lenders and investors?
By offering a more balanced view of performance patterns and trends.
What is the purpose of working capital ratios in financial analysis?
To evaluate the liquidity and short-term financial health of a business
In the context of financial analysis, what does an improvement in the current ratio from 1.75 to 2.00 signify?
An increase in the business's ability to meet short-term obligations
Which ratio is used to assess how effectively a business is managing its assets to generate sales?
Asset turnover ratio
What does the capital management ratio 'Earnings before interest, tax, depreciation and amortisation (EBITDA)' measure?
The profitability of a business after considering all expenses except taxes
Which financial metric is crucial for assessing a business's ability to pay its short-term obligations when they come due?
Current ratio
What is the significance of the funding gap mentioned in the text?
It indicates the period between cash outflows and inflows in a business cycle
Study Notes
Gearing and Operational Gearing
- Formula for calculating gearing: Not provided
- Operational gearing: Defined as the relationship between a company's fixed and variable costs, which affects its profitability and breakeven point
- Significance of assessing future profitability: Essential for determining a company's ability to generate earnings and remain competitive
Financial Ratios and Analysis
- Calculated gearing percentage for the company in Example 2.1: Not provided
- Operational gearing helps determine: A company's breakeven point and sensitivity to changes in sales and costs
- Key determinant of future profitability: Ability to generate earnings
- Post-balance sheet deterioration in ratios based on normalised pricing may go unnoticed by external analysts due to: Lack of access to up-to-date information
Financial Reporting and Consistency
- Consistency in financial reporting over time: Considered a positive indicator because it allows for more accurate comparisons and trend analysis
- Primary purpose of tracking key accounting ratios alongside breakeven and cash flow analysis: To gain a comprehensive understanding of a company's financial position and performance
Working Capital and Cash Flow
- Businesses rely on terms of credit to purchase stock: To conserve cash and improve working capital management
- Working capital ratios primarily indicate: A company's ability to manage its current assets and liabilities
- Accurate tracking of accounting ratios benefits lenders and investors by: Providing a more accurate assessment of a company's creditworthiness and investment potential
Ratio Analysis
- Purpose of working capital ratios in financial analysis: To assess a company's ability to manage its working capital and meet its short-term obligations
- Improvement in the current ratio from 1.75 to 2.00 signifies: An improvement in a company's liquidity and ability to meet its short-term obligations
- Ratio used to assess how effectively a business is managing its assets to generate sales: Asset turnover ratio
- Earnings before interest, tax, depreciation and amortisation (EBITDA) measures: A company's ability to generate earnings from its core operations
- Financial metric crucial for assessing a business's ability to pay its short-term obligations: Current ratio
- Significance of the funding gap: Represents the amount of financing required to meet a company's working capital needs
Test your knowledge on assessing financial statements and ratios, with a focus on the concept of gearing in financial analysis. Measure your understanding of how gearing is used to evaluate a company's borrowing position.
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