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Analysis of Accounts (Uses and Users of accounts (Managers (They will be…

- - - - Current assets : Current liabilities
      - If the current ratio is less than 1, it would mean that the business could have real cash flow problems, it could not pay off its short-term debts from current assets.
      - A 'safe' current ratio would be between 1.5 and 2, this result would mean that the business could only just pay off all of its short-term debts from current assets
      - If the current ratio is very high, say over 2.0, it could mean that too much working capital is tied up in unprofitable current assets
      - The current ratio is useful but it assumes that al current assets could be turned into cash quickly
    - - (Current assets - Inventories) : Current liabilities
      - A result of 1 would mean that the company could just pay off its short-term debts from its most liquid assets.
      - A result less than 1 would mean steps may have to be taken to improve the liquidity of the business
      - For example, reduce the level of inventories by selling some for cash
- - - - (Net profit : Capital employed) x 100
      - the higher the result, the more successful the managers are in earning profit from capital used in the business.
      - if this % increases, this means that the managers are running the business more efficiently - making higher profits from each dollar invested in the business
    - - (Gross profit : Sales revenue) x 100
      - Do not forget that this is before other expenses have been deducted and is not the final profit of the company
      - If increasing, either prices have been increased by more than the cost of goods have risen or costs of goods bought in have been reduced. Possibly a new supplier is being used or managers have negotiated lower cost prices
    - - (Net profit : Sales revenue) x 100
      - The higher the result, the more successful the managers are in making net profit from sales.
      - All other expenses including interest have been deducted from gross profit to arrive at net profit before tax