Lecture 7

Question 1

What are the key indicators to identity trends in?

Answer 1

Sales (revenue)
Net assets
Operating profit
Profit after tax
Earnings per share

Question 2

What is the aim of ratio analysis?

Answer 2

To build up a picture of the performance of the company

Question 3

When can absolute figures provide insights? (Provide examples)

Answer 3

If they can be compared with other relevant amounts in ratios
Eg. Sales as a multiple of fixed assets, profit as a percentage of sales

Question 4

What does ratio analysis allow?

Answer 4

Prediction of likely increase in profit given in an increased level of sales
Is profit level satisfactory?

Question 5

What are the comparisons that can be made (ratio analysis)?

Answer 5

Compare with earlier years - any trends or improvements?
Compare with company’s plan - in line with company expectations?
Compare with other companies in the same industry - external standard
Compare with industrial average

Question 6

What things does ratio analysis provide an insight in the performance of?

Answer 6

Management performance - judge how well company is being run by management
Liquidity - judgement of the adequacy of company’s cash and near cash resources
Gearing - measure of company’s financial risk
Investor ratios - judging a company as a stock market investment

Question 7

What is the equation for RETURN ON SHAREOLDER’S EQUITY?

Answer 7

(Profit after tax/share capital + reserves) x 100%

Question 8

What the equation to find RETURN ON CAPITAL EMPLOYED?

Answer 8

(Operating profit (before interest and tax)/(total assets - current liabilities)) x 100%

Question 9

What’s the equation for RETURN ON TOTAL ASSETS?

Answer 9

(Operating profit (before interest and tax)/total assets) x 100%

Question 10

What is the equation to find OPERATING PROFIT ON SALES?

Answer 10

(Operating profit (before interest and tax)/sales (revenue)) x 100%

Question 11

What’s the equation to find GROSS PROFIT PERCENTAGE?

Answer 11

(Gross profit/sales (revenue)) x 100%

Question 12

How would you calculate TOTAL ASSETS USAGE?

Answer 12

Sales (revenue)/total assets

Question 13

How would you calculate the NON-CURRENT ASSETS USAGE?

Answer 13

Sales (revenue)/non-current assets

Question 14

What is the CURRENT RATIO?

Answer 14

Current assets : current liabilities

Question 15

What is the ACID TEST/QUICK RATIO?

Answer 15

Current assets - inventory (stock) : current liabilities

Question 16

How would you calculate the STOCK HOLDING PERIOD (INVENTORIES HOLDING PERIOD)?

Answer 16

(Average inventories held/cost of sales) x 365

Question 17

How would you calculate the CUSTOMERS (DEBTORS) COLLECTION PERIOD?

Answer 17

(Trade receivables (debtors)/credit sales (revenue)) x 365

Question 18

How would you calculate the SUPPLIERS PAYMENT PERIOD?

Answer 18

(Trade payables (creditors)/credit purchases) x 365

Question 19

How would you calculate the figure for CREDIT PURCHASES?

Answer 19

Cost of sales + closing inventory - opening inventory

Question 20

What the equation for GEARING?

Answer 20

(Long-term loans/ordinary share capital + reserves) x 100%

Question 21

What’s the equation for INTEREST COVER?

Answer 21

Operating profit/interest charge

Question 22

What’s the equation for EARNINGS PER SHARE?

Answer 22

Profit after tax for ordinary shareholders/number of ordinary shares

Question 23

What is the PRICE EARNINGS RATIO?

Answer 23

Share price/earnings per share

Question 24

What’s the equation for DIVIDEND PER SHARE?

Answer 24

Dividends payable to ordinary shareholders/number of issued shares

Question 25

What’s the equation for DIVIDEND YIELD?

Answer 25

(Dividend per share/share price) x 100%