4. Anaylsis of Financial statements Flashcards
Name the profitability ratios (4)
ROCE
GPM
OPM
Asset turnover
Name the liquidity ratios (5)
Current ratio Quick ratio Inv days rec day pay days
Name the gearing ratios (2)
Gearing
Interest cover
Name the investor ratios (4)
EPS
Div yield
Div cover
P/E ratio
What is the ROCE ratio calculation
PBIT/ Capital employed (debt + equity)
Define ROCE and list pointers for the analysis
- How an entity turns its long term finance into profit
- Have their been any changes to profit?
Have their been any changes to funding structure?
What is the Gross Profit Margin ratio calculation
Gross profit / Revenue
List pointers for the analysis of Gross profit margin
- Have sales prices gone up/down?
2. Have COS gone up/down?
What is the Operating Profit Margin ratio calculation
Operating profit / revenue
List pointers for the analysis of Operating profit margin
increase or decrease of:
Revenue, COS, overheads, staff costs, one off costs, depreciation costs
Has it increased inline with GPM?
What is the Net asset turnover ratio calculation
Revenue / Capital employed
Define the use for net asset turnover in analysis
How well management can use the net assets at their disposal efficiently to generate sales
What is the Current ratio calculation
current assets/ current liabilities
Define Current ratio and list pointers for the analysis
- adequacy to meet current liabilities with current assets
- Low ratio is concerning as there could be a failure to meet liabilities
High current ratio, cash wasted that could be used for investment
High trade receivables = not collecting them fast enough
High inventory = potentially slow at moving stock
What is the Inv turnover period calculation
Inventory / COS
List pointers for the analysis of inv turnover
High turnover period could mean there are inventory control issues
May be a one off from bulk purchases to save cash
What is the receivables collection period calculation
Trade receivables / credit sales or sales
Define receivables collection period and list pointers for the analysis
- how long on average it is taking to collect debts
- If high amount, there may be an issue with credit control
If too short, then could be a potential cash flow issue
What is the purchases payment period calculation
Trade payables / credit purchases / COS
Define purchases payment period and list pointers for the analysis
- How long it takes on average its taking for the company to pay suppliers
- If its high, there may be cash flow issues and if continues, suppliers could refuse supply or reduce credit
If the company has good credit terms with a supplier, it will be high
If the company has a low payment period, it may not be properly utilising its credit
What is the gearing 1 calculation
Debt/ equity or loans + PSC / Ord SC + reserves + NCI (if group)
What is the gearing 2 calculation
Debt/ equity or loans + PSC / Ord SC + reserves + NCI (if group) + PSC
Define gearing and list pointers for the analysis
- Show us the degree of risk attached to the company
- Increase of risk with higher gearings / external finance
May not be able to get future credit from lenders if too high
Debts represented with liabilities that need to be paid every year (equity optional with divs but PSC obligatory divs)
What is the interest cover calculation
PBIT/ interest payable
What is the interest cover calculation definition
How many times can you pay finance liabilities with profits
What is the dividend yield calculation
Dividends / Share price (MV)
list pointers for the analysis with div yield calcs
Low div yield means that maket is expecting this div payment to grow in future
As SP is adjusted to speculate good investment/ good returns in future
What is the dividend cover calculation
PBIT / dividends
Define Dividend cover and list pointers for the analysis
- A calc that looks at how excessive/conservative the company pays its dividends from profits
The calc shows how many times it can cover its dividend payments
If it can’t cover there will be cash flow issues in future
what is the issue with historical cost accounting
If an item has been been revalued to its present value, readers of the FS cannot make an economic decisions as the figures are not relevant/ up-to-date
What is the issue with seasonal trading and ratios
May have a huge impact on ratio comparisons with other entities in the sector if their year ends/ period ends differ
What is the issue with ratios and NFP organisations
As profit is not their main objective, key ratios like ROCE, NA turnover, GPM, OPM and EPS are not relevant
List some other useful information that may help make a economic decision in relation to the FS
Cashflows News reports Share price MV Minutes/board meetings Staff turnover Budgets Internal memos future plans CEO reports Audit reports company objectives
