Dowson is a sizeable business that owns several shops. It sells a variety of electrical goods, including computers and televisions. The Finance Director has been reviewing some recent financial information, which is shown in Table 1. He is pleased with Dowson's liquidity, but he knows that its large debt burden must be reduced, including an overdraft of $6m. He remarked: ‘The economy is in recession. Many small retailers have failed. Size is an advantage!’
(a)[2]
What does the term ‘Return on capital employed’ mean?
(b)[2]
What does the term ‘recession’ mean?
(c)[4]
Identify and explain two ways in which Dowson's size could benefit the business.
(d)[6]
Identify and explain two problems for Dowson caused by having a high level of debt.
(e)[6]
Do you think the Finance Director is justified in being pleased with the business's liquidity? Support your view with the ratio results in Table 1.
Worked solution & mark scheme
This 20-mark question has a full step-by-step worked solution and mark scheme. One marking point: “The business's profit shown as a percentage of capital employed” …