Interpreting Published Accounts

Question 1

Four dimensions

Answer 1

1. Profitability - gross profit margin, net profit margin, return on capital employed
2. Firm liquidity - the ability of cash reserves and other near liquid assets to pay for current liabilities
3. Efficiency - the ability to make use of the firms resources
4. Shareholders - shareholders are interested I’m ratios because they want to make sure they have made the correct investment in terms of investment + security

Question 2

Gross profit margin

Answer 2

Takes into account direct costs

Question 3

Net profit margin

Answer 3

Takes into account both direct and indirect costs

Question 4

Return on capital employed

Answer 4

Measure the a amount of profit that one could receive as a result of the financial input you have invested into the company

Question 5

Liquidity

Answer 5

Short term

Current ratio

Current assets

Question 6

Current liabilities

Answer 6

Measures the ability of a business to meet its liabilities or debts over the next year. If the answer is around 2:1 then it would suggest that it could meet its current liabilities without selling non current assets.

If the current ratio is greater than 3:1 it would suggest that they are holding too much cash/ stock and are not investing in fixed assets

Question 7

How can they improve current ratio

Answer 7

1. Sell non - current assets

2. Negotiate long term loan

Question 8

Acid test

Answer 8

Shows us the ability to pay for short term creditors, this is seen as a more realistic ratio then the current ratio as it does not take into account stock (inventories)

Question 9

Using acid test ratio

Answer 9

Any answer which is 1.1 is okay, anything less suggest that the firm may have a problem paying off its creditors (short term)

Question 10

Gearing (long term)

Answer 10

Any gearing ratio larger than 50% is said to be highly geared - risky

Question 11

How can they improve their gearing ratio

Answer 11

1 by converting loans to shares
2 issuing more shares
3 pay off long term loans

Question 12

Efficiency ratios

Answer 12

Efficiency is maximising your output from your input

Asset turnover = sales/ net assets

Result is expressed in pence

Question 13

How can they improve their efficient ratio

Answer 13

By closing units which have poor asset turnover, they can increase sales per sq foot but remember we can increase sales but reduce profits. So although we have become profitable we have become less efficient

Question 14

Stock turnover

Answer 14

Stock turnover ratio measures the number if times in the trading year that a business sells its stock

Question 15

How can they improve stock turnover

Answer 15

1. Changing stock method

2. Selling goods at cheaper prices

Question 16

Debtor days

Answer 16

A small firm will take longer than a large firm to collect debts. Small firms in a highly competitive market have little power, they do not have the resources to take people to court to recoup money owed to them

Question 17

How can debtor days be improved

Answer 17

1. Chase up debtors on a more frequent basis

2. Sell goods more quickly, more promptly

Question 18

Payable days

Answer 18

If the answer is low, then it can improve payments by delaying payments

If the answer is night it might develop a poor reputation with suppliers and be given poorer credit deals in the future, although this depends upon the power of an organisation. A large organisation such as Tesco has the power to do this, further they might be charged in late payments