Analysis of Published Accounts

Question 1

liquidity ratios

Answer 1

how easily a business can meet its short-term debts.
- current ratios
- acid test ratios

Question 2

liquidity ratios analysis

Answer 2

represented by working capital: too little = illiquid + cannot pay debts, can be put to better use elsewhere.

Question 3

current ratios

Answer 3

current assets/current liabilities
- 2:1 is ideal
- too high = excessive assets

Question 4

acid test ratios

Answer 4

current assets-inventory/current liabilities
- 1:1 is ideal
-exclude inventory because its hard to convert inventory quickly

Question 5

how to improve liquidity

Answer 5

• reduce inventory levels for cash but this may damage brand image/quality
• implement JIT
• increase loans
• delay payment to suppliers
• speeding up accounts receivable

Question 6

profitability ratios

Answer 6

how effectively a company generates profit from its resources
- ROCE
- gross profit margin
- net profit margin

Question 7

profitability test analysis

Answer 7

important when attracting investors, ensures growth + sustainability, helps with investment and expansion decisions

Question 8

ROCE

Answer 8

(operating profit/capital employed) x100
- measures efficiency of capital in making profit

Question 9

capital employed

Answer 9

(total assets - current liabilities) + long term debt

Question 10

gross profit margin

Answer 10

(gross profit/revenue) x100
- shows how much profit is made after deducting cost of goods
- declining margin = rising costs and also pricing pressures

Question 11

net profit margin

Answer 11

(net profit/revenue) x100
- shows how much revenue remains as profit after all expenses are deducted

Question 12

how to improve profitability

Answer 12

• increase sales revenue
• reduce direct costs by negotiating lower supply prices
• improve efficiency so less waste and automation required
• enhance pricing strategy

Question 13

financial efficiency ratios

Answer 13

managing assets and liabilities to remain competitive
- rate of inventory turnover
- trade receivables turnover
- trade payables turnover

Question 14

rate of inventory turnover

Answer 14

cost of goods sold/ average inventory
- measures if inventory is selling quickly (high) or not (low)

Question 15

average inventory

Answer 15

(opening inventory + closing inventory)/2

Question 16

trade receivables turnover

Answer 16

(trade receivables/ credit sales) x365
- measures how fast customers pay invoices
- low is better
- high = delay

Question 17

trade payables turnover

Answer 17

(trade payables/ credit purchases) x365
- how long it takes for a business to pay suppliers
- low is worse = suppliers are being paid quickly

Question 18

how to improve financial efficiency

Answer 18

1. reduce inventory levels
2. encourage faster customer payments
3. JIT implementation
4. Delay payment to suppliers

Question 19

equity

Answer 19

value of shares

Question 20

current meaning

Answer 20

equivalent to cash/ will be exchanged for cash within 1 year

Question 21

gearing ratios definition

Answer 21

how much finance comes from debts/ loans

Question 22

high gearing

Answer 22

more debt

Question 23

gearing ratio

Answer 23

(non-current liabilities/capital employed) x100

Question 24

gearing ratio analysis

Answer 24

50% up= heavy reliance on debt
50% down= relies heavily on equity but could limit expansion

Question 25

how to improve gearing

Answer 25

- reduce debt by repaying loans - increase equity - boost profitability - improve cash flow management

Question 26

investment ratios

Answer 26

is investment worthwhile? measures the return on investment - dividend yield - dividend cover - price earning ratios

Question 27

dividend yield

Answer 27

(dividend per share/ market share price) x100 - shows percentage returns - high = better cash returns, limited growth - low = low immediate returns but capital appreciation

Question 28

dividend per share

Answer 28

total annual dividends/ total issued shares

Question 29

dividend cover

Answer 29

EPS/ dividend per share - high ( 2+): more earnings for growth - low (- 1.5): large portions of earnings as dividends

Question 30

price earning ratios

Answer 30

market share price/ EPS - high (20+) overvaluation but strong growth evaluation - low (-10) undervaluation

Question 31

EPS (earning per share)

Answer 31

profit of year/ number of shares issued

Question 32

How to improve Investor Returns

Answer 32

- increase profitability - boost dividend payments -enhance growth to raise share prices - improve financial efficiency.