21 Interpretation of financial statements Flashcards
How do you calculate gross profit?
Gross profit/revenue x 100
What are some potential reasons for movement in gross profit?
Selling prices, sales mix, purchase cost, production cost
How do you calculate operating profit?
Operating profit/revenue x 100
What are some potential reasons for movement in operating profit?
Gross profit
Expenses admin/distribution
How do you calculate asset turnover?
Revenue/capital employed
What are some potential reasons for movement in asset turnover?
Increase/decrease in revenue
Increase/decrease in non-current assets
Increase/decrease in working capital
How do you calculate return on capital employed?
Profit from operations/capital employed x 100
How do you calculate capital employed?
Equity+Non current assets
How are some potential reasons for movement in return for capital employed?
Efficiency: moment in asset turnover
Profitability: movement in operating profit
Combination of both
How do you calculate current ratio?
Current assets/current liabilities
How do you calculate for quick ratio?
Current asset - inventory / current liabilities
What are some reasons for movement in current/quick ratio?
Increase/decrease in cash balance
Increase/decrease in inventory
Increase/decrease in receivables
Increase/decrease in payables
How do you calculate inventory turnover?
Cost of sales/inventory
How do you interpret inventory turnover?
Number of times inventory is turned over in the period
Higher turnover = higher efficiency
How do you calculate inventory holding period?
Inventory/cost of sales x 365 days
How do you interpret inventory holding period?
Average number of days for which inventory is held
Lower days = higher effifency
What are some reasons for movement in inventory holding period?
Improved/worse inventory control
Obsolete inventory
Increased level of inventory to stimulate sales
How do you calculate receivable collection period?
Receivables / revenue x 365 days
What are some reasons for movement in receivables collection period?
Improved/worse credit control
Irrecoverable debts
Increased credit terms to stimulate sales
How do you calculate payables payment period?
Payables/credit purchases x 365 days
What is the working capita; cycle?
Inventory days + receivables days - payable days
How do you calculate gearing?
Debt / debt + equity x 100%
What is the alternative gearing formula?
Debt/equity
How do you calculate interest cover?
Profit before interest/finance costs
How do you calculate earnings per share?
Profit available to ordinary shareholders / number of ordinary shares
How do you calculate price/earnings ratio?
Current share price/latest EPS
What does a price/earnings ratio show?
Represents a measure of market confidence in companies capacity for growth. A high P/E ratio suggests high growth is expected
How do you calculate dividend yield?
Dividend per share/current share price
What does dividend yield represent?
Potential return on investment for prospective investors and can be compared to yields available on alternative investments
How do you calculate dividend cover?
Profit after tax/dividends
What does a dividend cover represent?
Similar to interest cover, indicates how many times current dividend could be paid from current profit level,. A high cover indicates that dividend level is able to be maintained.
What are the three value for money?
Effectiveness
Efficiency
Economy
