Please enable JavaScript.
Coggle requires JavaScript to display documents.
Evaluating performance (Debt ratio (Stability indicator that measures the…
Evaluating performance
-
-
Debt ratio
Stability indicator that measures the percentage of a firm's assets that are financed by liabilities
-
-
-
Link between ROI and DR - if debt ratio is high this means the business is more reliant on borrowed funds to fund assets and this means the business can use external funds while still receiving all the profit, a balance must be struck that the debt ratio is high enough to maximise ROI but not too high that there is a great debt burden on the business
Return on assets
A profitability indicator that measures how effectively a business has used its assets to earn profit
-
Net profit/average total assets x 100 = amount of net profit earned per dollar of assets controlled by the business
-
Asset turnover
An efficiency indicator that measures how productively a business has used its assets to earn revenue
-
-
ROA and ATO - ATO looks at how capable the firm is of using its assets to earn revenue while ROA looks at how effectively the business has used it assets to earn revenue
Gross profit margin
A profitability indicator that calculates the percentage of sales revenue that is retained as gross profit
-
Measures the average mark up and assesses expense control specifically related to costs of goods sold
Net profit margin
A profitability indicator that measures overall expense control by calculating the percentage sales revenue that is retained as net profit
-
NPM ATO and ROA - ROA depends on both ATO and NPM as the ability to use assets to earn profit which depends on both the ability to earn revenue and control expenses
Working capital ratio
A liquidity indicator that measures the ratio of current assets to current liabitilies to assess the firms's ability to meet its short term debts using cash generated from its current assets
Current assets/current liabilities = the business has $? of current assets for every $1 of current liabilities
Less than 1:1 - unsatisfactory as it means the business may not have sufficient current assets to finance its short term debts as they fall due, owner may be required to make a contribution or take out a loan
More than 1:1 - satisfactory liquidity as there is sufficient current assets to finance short term debts as they fall due but business should be wary of it being too high as an excess idle current assets means the business may not be maximising it revenue generation
Quick asset ratio
A liquidity indicator that measures the ratio of quick assets to quick liabilities to assess the firms ability to meet its immediate debts
WCR and QAR - WCR assumes that all current assets can be liquidated immediately if cash is needed however there is no guarantee that inventory can be sold immediately and the business is already selling it as fast as it can and prepaid expenses cannot be converted back into cash
Current assets (less inventory and prepaid expenses)/current liabilities = the business has $? of quick assets for every $1 of quick liabilities
WCR and QAR can differ as a result of large investment in inventory meaning the business' ability to meet short term debts will rely heavily on its ability to sell inventory
Cash flow cover
A liquidity indicator that measures the number of times net cash flows from operations is able to cover the average current liabilities
Net cash flows from operations/average current liabilities = net cash flows from operations is able to cover average current liabilities ... times per year
CFC WCR and QAR - CFC assesses liquidity using actual cash flows the business generates while WCR and QAR rely on static times to measure future potential cash flows avilable to meet short term debts
Inventory turnover
A efficiency indicator that assesses how effectively the firm has managed its inventory by calculating the average number of days taken to sell inventory
-
-
Too slow - higher number of days, less able to generate sales and thus cash inflows to meet short term debts as they fall due
Too fast - low number of days, greater ability to generate sales and thus cash inflows in order to meet short term debts as they fall due, should consider whether selling price is too low or if the business is holding too little inventory on hand
-
-