l10.2 : interpretation Flashcards
state some external users of financial statements.
investors
suppliers
lenders
customers
employees
gvt agencies
what is horizontal analysis?
comparison to previous years. investigate major increase & decreases. meaningful to give % changes
what is trend analysis?
horizontal analysis using more than 2yrs of data
what is vertical analysis?
take specific account (eg. revenue) & set base period. express all values as index to base
what is ratio analysis?
shows rs between 2 or more figures within same set of FS. must have point of reference (past years, same industry, specificied standard). examine any changes and components in ratios.
state and describe the five categories of ratios.
profitability - effectiveness in generating profits
liquidity - ability to meet liabilities when they fall due
efficiency - effectiveness of use of business assets
gearing - financial structure
investors - returns
state and explain the equation for ROCE.
profit from operations (PBIT) / capital (equity + long term debt)
how much profit is generated from capital invested?
state and explain the equation for net profit margin.
pbit / revenue
profit that business earned on sales
state and explain the equation for asset turnover.
revenue / net assets (total assets - current liabilities)
level of revenue generated per £1 of net assets employed
what can changes in GP% be due to?
changes in selling price
changes in purchasing prices & COGS
sales mix
inventory loss
state the equation for current ratio.
current assets / current liabilities
state the equation for quick ratio.
(current asset - inventories) / current liabilities
state and explain the equation for inventory holding period.
(avg inventory / COS) x 365
avg length of time from purchase to sale
state and explain the equation for receivables collection period.
(receivables / credit sales) x 365
number of days takes to receive payment from customers
state and explain the equation for payables payment period.
(payables / credit purchases) x 365
number of days takes to pay suppliers
state the equation for cash conversion cycle.
inventory days + receivables days - payables days
state the equations for gearing ratios.
debt / equity
debt / debt + equity
(debt usually net debt –> debt - cash/ equivs.)
state and explain the equation for interest cover.
pbit / finance costs
ability of company to meet debt servicing cost
state and explain the equation for return on equity.
profit attributable to equity SH / SH funds (equity)
total return as % of their investment
state and explain the equation for earnings per share.
profit attributable to equity SH / no. equity shares
earnings available to each equity shareholder
state and explain the equation for P/E ratio.
market price per share / EPS
no. of times market price exceeds current earnings, indicator of market confidence
state and explain the equation for dividend cover.
profit after tax & pref. dividends / total equity divs
useful for lenders to ensure dividends not being overcompensated
state the equation for dividend per share.
total equity dividends / no. of equity shares
state and explain the equation for dividend yield.
dividend per share / market price per share
actual div. return on actual investment
state four limitations of using ratio analysis.
- retrospective nature
- b2b companies, have diff accting policies
- inflation impact not considered
- economic climate
what is the purpose of the altman model & taffler model?
used to predict corporate failure. uses weightings of each ratio to calculate final score to determine likelihood of failure / success.
what are KPIs?
key progress indicators which are financial & non-financial that reflect current and future performance. often used to award bonuses.
