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Topic 22 - Analysis
Term | Definition |
---|---|
Horizontal Analysis | Analysis carried out by making a comparison of financial results across the page, usually by reporting on several consecutive trading periods. |
Interpretation | The process of explaining the meaning of a financial item or analytical ratio. |
Liquidity | The ability of a business to meet its short-term debts as they fall due. |
Net Profit Ratio | Net profit/sales; used to determine the percentage of the sales dollar that remains after all expenses have been taken into account. |
Profitability | A comparison of profit with a base figure, such as assets employed, capital invested or sales made. |
Quick Asset Ratio (or Acid Test Ratio) | Current assets less stock and prepayments/current liabilities less overdraft; used to measure immediate liquidity. |
Ratio | A comparison of two items that are somehow related in order to analyse an aspect of business performance. |
Return on Assets | Net profit/average assets; used to measure how well management has used its investment in assets to earn profit. |
Return on Owner's Investment | Net profit/average owner's equity; used to measure the return earned on the investment of funds by the proprietor of a business. |
Trend Analysis | Measuring the change in a financial item or a ratio over several reporting periods. |
Vertical Analysis | The breaking down of an accounting report into percentages in a vertical fashion down the page. |
Working Capital | Current assets - current liabilities; used to measure the liquidity of a business, expressed in dollars. |
Working Capital Ratio | Current assets/current liabilities; used to measure the liquidity of a business. Can be expressed as a ratio or percentage. |