INVESTMENT RATIOS BUSINESS VOCABULARY IN USE (ADVANCED)

 

BUSINESS VOCABULARY IN USE (ADVANCED) 38. INVESTMENT RATIOS

 

A Return on assets Clara Freeman is an analyst at a large investment bank: ‘We can check the health of the company by looking at investment ratios: the relationship of one key figure to another. The performance of different companies in the same industry can also be compared by looking at the same ratios in each company. B Return on equity ‘Return on equity (REO) measures how well a company’s managers are using shareholder’s equity to invest in activities and resources that generate profit for shareholders. For example, if in a particular year profit before tax is £50,000 and the company has shareholders’ equity at hat time of £500,000, it has ROE in that year of 10 per cent. C Leverage ‘To get a better return on equity, companies may borrow in the form of loans and/or bonds. The amount of a company borrows and the interest it pays on this in relation to its share capital is leverage1. Income leverage is the amount of interest a company pays on its borrowing in relation to its operating profit. This can be expressed as a percentage: for example, a company that makes £80,000 in operating profit in a particular period and pays £20,000 in interest has leverage of 25 per cent. The relationship can also be expressed as a ration in terms of interest cover – the number of times it could pay the interest out of its operating profit – in this case, four times. EXERCISES 38.1 Match the two parts of these sentences containing expressions from A and B opposite. 1 The weakest part of the group is the leisure division, a most of which have operated at well below capacity. 2 Analysts spend many hours studying balance sheets, b where return on assets last year was only 7,6 per cent. 38.2 Look at B and C opposite. Study the figures in the table for a UK company for year 1. Then complete the table for years 2 and 3. 38.3 Look at the completed information in the table above. Some analysts are saying that in Year 3 Ajax may be having difficulty paying interest in relation to its operating profit. Which expression in C opposite do they use to talk about this?

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