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Using Financial Ratios

Using Financial Ratios. A2 Business Studies. Aims and Objectives. Aim: To understand how to use financial ratios. Objectives: Explain the uses of financial ratios. Calculate financial ratios. Analyse financial ratios. Evaluate financial ratios. Starter Activity.

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Using Financial Ratios

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  1. Using Financial Ratios A2 Business Studies

  2. Aims and Objectives Aim: • To understand how to use financial ratios. Objectives: • Explain the uses of financial ratios. • Calculate financial ratios. • Analyse financial ratios. • Evaluate financial ratios.

  3. Starter Activity • Brainstorm in groups the reasons why businesses and stakeholders may use financial ratios.

  4. Using Financial Ratios • Ratio analysis can be extremely useful as a management tool. • Can be used to measure performance. • Decision making tool. • Investors can judge performance. • Shareholders can judge how well managers are performing.

  5. Using Financial Ratios Use ratios to analyse Apple’s performance. • Operating Profit Margin • Current Ratio • Acid Test Ratio • ROCE • Asset Turnover • Stock Turnover • Creditor Days • Debtors Days

  6. A Worked Example Operating Profit Margin. • Shows the relationship between profit and sales. • (Operating profit / Sales) X100 • (545/1390) X 100 = 39.2% • This shows for every £1 of sales 39.2p is operating (Net) profit. • This is reasonably high, showing that Apple has a tight control over their expenses whilst benefitting from high profit margins. • Apple however is in very competitive markets, and this high profit margin may not be sustainable. Ultimately it will depend on technological advances and whether Apple can remain as a first mover in the market, whilst keeping a tight control over their costs.

  7. Using Financial Ratios Use ratios to analyse Apple’s performance. • Operating Profit Margin = 39.2% • Current Ratio = 1:1.15 • Acid Test Ratio = 0.96:1 • ROCE = 41.9% 42p profit generated for every £1 on Capital • Asset Turnover = 42.7 for every £1 spent on assets 42.7p was generated in profit. • Stock Turnover = 13.52 times a year • Creditor Days = 57.5 days • Debtors Days = 35.4 days

  8. Apple’s Finances Discussion of Apples’ Financial Situation. • Is it sustainable? • What factors may affect Apples’ financial ratios? • What effects may these financial ratios have on potential investors? • Would you invest in Apple at 374.60 per share having calculated their ratios?

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