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Ratio Analysis - Coggle Diagram
Ratio Analysis
NPM (net profit margin)
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influenced by 1 off items, doesn't focus on sales or revenue growth
improve by increasing revenue, improving pricing strategies
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Acid Test Ratio
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used to see if firm has sufficient short term assets to cover immediate liabilities (short term liquidity)
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improve by lowering inventory, increase current assets, decrease current liabilities
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Breakeven
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less useful if more than 1 product, accuracy relies on quality of data, assumes all output sold, doesn't consider external changes
improve by lowering unit costs, constantly assess external influences, high data quality
Gearing
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used to see if company has borrowed too much eg cant repay interest/ loans, proportion of long term funding which has come from debts
lower than 30% = bad, over 60% bad, aim for 30-60%
window dressing presents company in best light- not accurate , operation in different markets make comparison less useful
improve by paying loans back quicker, increase retained earnings
ROCE
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compares operating profit with money invested to measure efficiency of generating profit from investments
ideal= higher ROCE, typically 20-30%
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improve by increases sales (USP, marketing), reduce costs (cheaper suppliers), reduce loans
Current ratio
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ideally between 1 and 2, less than 1 bad, more than 2= need to invest
improve by delaying purchases requiring cash payments, sell capital assets/ unproductive assets
Investment appraisal
NPV (net present value)
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may not be best investment, can't compare projects of different sizes, complex, result dependent on rate of discount
improve by reviewing discount rate regularly, cut unnecessary expenses
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Payback
improve by ensuring accurate forecast, increase efficiency, maximise sales
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very simple, doesnt consider time value of money
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