perform ratio analysis to measure the profitability, liquidity and efficiency of a given organisation and analyse the performance of a business using suitable ratios
An-
Definition Formula Calculation swer Explanation
Liquidity ratios
measure how sol-
vent a business
is and how they
are able to meet
Liquidity short-term debts.
SIGNature for every £1 the SIG-
Nature owes in current liabilities
Is the amount of it owns £4,64 in current assets.
current assets in Current As- SIGNature has more than suffi-
Current Ra- relation to current sets/Current 71,960/15,5 cient liquidity to meet current lia-
tio liabilities. Liabilities 00 4.64:1 bilities.
SIGNature for every £1 SIGNa-
ture owns £3.87 in liquid assets.
SIGNature has sufficient liquid-
The amount of Current As- ity to meet current liabilities if
current assets in sets- immediate repayment was de-
Acid Test relation to current Stock/Cur- 71,960 - manded and not have to be
Liquidity liabilities, exclud- rent Liabili- 12,000/15,5 forced into taking an overdraft or
Ratio ing stock. ties 00 3.87:1 loan.
Are used to as-
sess how well a
management is
controlling key
aspects of the
business, primary
stock and fi-
Efficiency nances.
SIGNature customers on aver-
age take 34 days to pay for their
purchases. SIGNature could al-
low their customers to have a
longer period to pay for their
purchases after paying a larger
deposit which allows customers
to finish payment after a months
time. Benefits such as customer
Measures on av- loyalty and business attractabil-
erage how long it ity could increase however, they
Debtors takes for debtors Debtors/ could suffer from cash flow
Payment to pay for their Credit Sales 41,000/444, 34 problems and be forced to take
Period purchases. x 365 000 x 365 days out an overdraft.
Measure on aver- SIGNature pays its suppliers in
age how long it 31 days on average. Buy paying
takes a company Creditors/ their suppliers within a months
Creditors to pay for goods Credit Pur- period can allow a better rela-
Payment and services that chases x 15,500/187, 31 tionship between the supplier
Period are bought on 100 800 x 100 days which can benefit the cost of
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