Back to the full dot-point answer

QLDBusiness StudiesQuick questions

Unit 3: Business diversification

Quick questions on Financial ratio analysis for diversification decisions (QCE Business Unit 3)

14short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.

What is profitability ratios?
Show answer
$Gross profit ratio=Gross profitSales=Sales−COGSSales\text{Gross profit ratio} = \frac{\text{Gross profit}}{\text{Sales}} = \frac{\text{Sales} - \text{COGS}}{\text{Sales}}$
What is liquidity ratios?
Show answer
$Current ratio=Current assetsCurrent liabilities\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$
What is efficiency ratios?
Show answer
$Asset turnover=SalesTotal assets\text{Asset turnover} = \frac{\text{Sales}}{\text{Total assets}}$
What is gearing ratio?
Show answer
$Debt to equity=Total liabilitiesTotal equity\text{Debt to equity} = \frac{\text{Total liabilities}}{\text{Total equity}}$
What is using ratios for diversification decisions?
Show answer
A business considering diversification (a new market, a new product line, FDI) uses financial ratios to test capacity.
What is worked Australian example?
Show answer
Imagine the same QLD manufacturer considering FDI into Vietnam. Financial check:
What is limitations of financial ratios?
Show answer
:::worked Worked example "A business reports gross profit 1.6million;sales1.6 million; sales 4 million; net profit 400,000;totalequity400,000; total equity 2.5 million; total liabilities 1.5million;currentassets1.5 million; current assets 900,000; current liabilities $600,000. Calculate the gross profit ratio, ROE, current ratio and D/E. Interpret each. (6 marks)"
What is diversification target screening?
Show answer
If acquiring an overseas business, the target's ratios reveal its financial position. Strong target ratios mean a smoother acquisition; weak ratios mean an integration challenge.
What is verdict?
Show answer
The business has the financial capacity for moderate FDI. A 5millionVietnaminvestmentcouldbefundedwith5 million Vietnam investment could be funded with 3 million debt (taking D/E to about 0.9, still moderate) and $2 million from operating cash and retained profits. The strong profitability supports the investment thesis; the moderate gearing leaves headroom for the next stage of investment.
What is combined picture?
Show answer
Strong profitability (40% gross, 16% ROE), healthy liquidity (1.5 current ratio), conservative gearing (0.6 D/E). The business is in good financial shape and has capacity to invest in diversification, growth, or higher shareholder distributions. :::
What is treating high gearing as universally bad?
Show answer
Utilities and infrastructure businesses run gearing above 1.5 routinely.
What is forgetting that supermarkets run low current ratios by design?
Show answer
Negative working capital is structural for fast-turnover retailers.
What is confusing gross profit and net profit?
Show answer
Gross profit is after COGS only. Net profit is after all expenses including interest and tax.
What is ignoring industry benchmarks?
Show answer
A 2 percent net margin is strong for a supermarket and weak for a software company. Always frame the number against the relevant industry. :::

All Business StudiesQ&A pages