Understanding Financial Ratios for Business Performance Evaluation

The video tutorial provides an overview of financial ratios, explaining their importance for businesses and stakeholders. It covers profitability ratios like gross profit margin, operating profit margin, and ROCE, which measure a business's ability to generate profit. Gearing ratios are discussed to assess a firm's reliance on borrowed funds and the associated risks. Efficiency ratios, including inventory turnover, receivables days, and payables days, are explained to evaluate how well a business utilizes its resources and manages cash flow. The tutorial highlights the benefits and limitations of using financial ratios for performance measurement.

Why are financial ratios important for businesses?

• They help in assessing business performance and strategic planning.

• They are used to calculate taxes.

• They determine employee salaries.

• They are only useful for external stakeholders.

What does the gross profit margin indicate?

• The amount of borrowed funds.

• The efficiency of stock management.

• The basic level of profit as a percentage of revenue.

• The total revenue of a business.

How is the Return on Capital Employed (ROCE) calculated?

• By dividing gross profit by sales revenue.

• By dividing operating profit by capital employed.

• By multiplying net income by 100.

• By dividing total liabilities by total assets.

What does a high gearing ratio indicate?

• A business is highly reliant on borrowed funds.

• A business has low receivables days.

• A business has efficient inventory management.

• A business has high profitability.

Why is it risky for a business to be highly geared?

• It increases the cost of goods sold.

• It makes the business vulnerable to economic shocks.

• It reduces the gross profit margin.

• It shortens the payables days.

What does inventory turnover measure?

• The total capital employed by the business.

• The number of times stock is replenished annually.

• The average time to receive payments from customers.

• The average time to pay suppliers.

How can a business improve its cash flow management?

• By increasing receivables days.

• By reducing inventory turnover.

• By decreasing payables days.

• By delaying payments to suppliers.