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QLDBusinessUnit 3: Business diversification

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

5short 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 are profitability ratios?
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$Gross profit ratio=Gross profitSales=Sales−COGSSales\text{Gross profit ratio} = \frac{\text{Gross profit}}{\text{Sales}} = \frac{\text{Sales} - \text{COGS}}{\text{Sales}}$
What are liquidity ratios?
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$Current ratio=Current assetsCurrent liabilities\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$
What are using ratios for diversification decisions?
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A business considering diversification (a new market, a new product line, FDI) uses financial ratios to test capacity.
What is diversification target screening?
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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?
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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.

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