analysing financial performance Flashcards
what are the main components of a balance sheet
- assets- resources used by the company in order to run the business
- liabilities- debts of the company has
- owners equity- Part of assets belonged to owners
- non current assets- property, equipment
- non current liabilities- bank loans
What is working capital?
the difference between current assets and current liabilities
What is capital employed?
Is the total amount of investment made for running the business
What is depreciation?
When a product decreases in value
Working capital calculation
current assets - current liabilities
Capital employed formula
(non-current assets + current assets) - current liabilities
Depreciation Calculation (straight line method)
(Historic cost of value- residual value) / useful life of asset
ROCE (return on capital employed) calculation
(Operating profit/ capital employed) x 100
Current Ratio Formula
Current Assets / Current Liabilities
Acid Test Ratio calculation
( current assets - stock) / current liabilities
Gross Profit margin calculation
( total revenue - cost of goods) / total revenue
Net profit margin calculation
(Net profit / revenue) x 100
Gearing Ratio Calculation
( non-current liabilities / capital employed) x 100
If the gearing ratio is over 50% then it is…
From loans and an investor
What is a gearing ratio?
It looks at the long-term finance of a business and where it comes from
If the gearing ratio is below 50% then it is…
The money comes from the owners and it has higher risk for investment
Residual value meaning
The worth of the fixed assets at the end of its useful life, what it can be sold for e.g.eBay
What are limitations of ratio analysis?
- balance sheet is just a snapshot
- The ratio is only as good as the information provided
- it will need comparisons in order to have a percentage
What is window dressing?
- The organisation of financial information is to look for the best way to investors.
- It often makes the liquidity and profitability of a business appear stronger than they are
Methods of Window Dressing
- exceptional items - “one off” receipts of money
- brand valuations - intangible assets could be revealed higher
- sales and lease - large capital outlays are recovered and put back into the business
Why window dress accounts?
- strengthen share price to attract investors
- manager praise and recognition
- lower tax by ‘reducing profits’
