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ICAS - AFin > P1 Ratios > Flashcards

P1 Ratios Flashcards

1
Q

Uses of ratio analysis

A
  • To review the performance of an organisation over time
  • Compare the performance of organisation with specific competitors
  • Compare performance with published industry averages
  • Use analysis of past performance to help forecast future performance
  • Highlight problems in a company
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2
Q

Profitability ratios

A

Indicator company’s efficiency at generated profits or revenue from available resources

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3
Q

Liquidity ratios

A

Indicate company’s ability to pay for its liabilities

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4
Q

Management/ activity ratios

A

Provide information about efficiency of management at controlling the business

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5
Q

Capital risk ratios

A

Provide information about exposure to risk

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6
Q

Return on capital employed ROCE (primary ratio)

A

(PBIT / Capital employed) x 100

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7
Q

PBIT also known as

A

Operating profit

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8
Q

Problem with ROCE

A

Particularly sensitive to valuation of non current assets

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9
Q

Return on capital employed ROCE measures

A

The return generated by organisation from available capital > how efficient organisation is at generated profits from its capital

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10
Q

Return on equity (ROE) measures

A

Profits made by organisation for the shareholders

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11
Q

Return on equity =

A

(Profit available for ordinary shareholders / Total equity) x 100

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12
Q

Net profit margin =

A

(PBIT / Revenue) x 100

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13
Q

Net profit margin considers

A

PBIT as a percentage of revenue

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14
Q

Asset turnover =

A

Revenue / capital employed

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15
Q

Asset turnover shows

A

Useful information about efficiency of company at generating revenue from its capital

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16
Q

ROCE =

A

Net profit margin x asset turnover

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17
Q

If ROCE moves from one year to the next

A

Should calculate net profit margin and asset turnover to provide more info

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18
Q

Gross profit margin =

A

Gross profit / revenue x 100

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19
Q

Gross profit margin measures

A

Ability of the business to sell goods for more than they cost to make

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20
Q

Current ratio =

A

Current assets / current liabilities

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21
Q

Current ratio assesses

A

Organisation’s ability to meet its short term debts

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22
Q

Quick ratio =

A

(Current assets - inventory) / current liabilities

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23
Q

Quick ratio is

A

Harsher test of liquidity

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24
Q

Days trade receivables

A

(Trade receivables / credit sales) x 365

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25
Days trade receivables shows
Approx number of days credit customers are taking to pay their debts
26
VAT treatment of days trade receivables
Must either strip out VAT from receivables ( x 5/6) or gross up sales to include VAT (x 1.2)
27
Days trade payables
(Trade payables / Credit purchases and overheads) x 365
28
Days trade payables shows
The number of days' credit the business is taking from its suppliers
29
Purchases
COS - opening stock + closing stock
30
Inventory days
(Inventory / Cost of sales) x 365
31
Inventory days measures
How many day's inventory the company holds on average
32
Cash operating cycle =
Inventory days + days trade receivable - days trade payables
33
Inventory turnover =
Cost of sales / inventory
34
Inventory turnover shows
Number of times inventory was sold during the year
35
Gearing
(Long term debt + preference shares) / x 100 | total equity OR capital employed
36
Gearing ratio shows
What proportion of assets of the company have been financed by lenders rather than shareholders
37
If redeemable, preferences shares should be
Classified as debt
38
Debt ratio =
(Total debt / total assets) x 100
39
Interest cover =
PBIT / Interest Charges
40
Interest cover ratio shows
The number of times that the company can afford to pay its interest charges
41
Earnings per share (EPS) =
Profit attributable to ordinary shareholders / Number of ordinary shares in issue
42
Price earnings (PE) ratio =
Share price / earnings per share
43
PE ratio shows
Value of the share price as a multiple of the earnings per share > shows how many times the earnings per share an investor is prepared to pay to buy a company share
44
Earnings yield =
Earnings per share / Share price OR 1 / PE
45
Dividend cover =
Profits available for distribution to ordinary shareholders / Dividends paid
46
Dividend cover shows
Measure of how many times the dividend actually paid divides into the profits that could have been paid out as a dividend by the company
47
Dividend yield =
(Dividend per share / share price) x 100
48
Dividend yield measures
Annual return received in dividends as a percentage of current share price
49
Debt provider ratios
- Asset cover > assets of the business provide security for debt, should be > 1 - Cash flow cover > review cash flow forecasts to ensure capital and interest repayments can be repaid comfortably
50
Limitations of ratio analysis - four key categories
- Timing - General - Comparisons between companies - Other sources of information
51
Timing limitations of ratio analysis (4)
- Seasonal variations may be missed - Can adjust payment patterns towards YE to manipulate ratios - If new accounting standards introduced, like for like comparison is hard - Inflationary effects may be missed
52
General limitations of ratio analysis (4)
- Only guidelines - Assumptions and estimates made are subjective - Difficult to access sufficient information - Difficult to produce meaningful analysis on consolidated financial statements across a number of industries
53
Comparisons between companies > limitations of ratio analysis (3)
- Companies and policies must be comparable - Allow for differing accounting policies - Cost classification should be considered
54
Ratios should be considered alongside
Other sources of information eg chairman's statement, auditor's report, publicity
55
Financial distress
Occurs when a company is unable to pay its debts as they fall due. If a solution is not found, will lead to insolvency
56
Z score
Designed to overcome some of basic difficulties with accounting ratios - form of multivariate analysis and considers a number of ratios simultaneously
57
Z score > 3
Sign of health
58
Z score < 1.8
Could mean the company is heading for insolvency
59
Limitations of Z score model (4)
- Different companies classify items differently - Lack of specified time frame - Model is not scientifically proven - Calculated upon historic data
60
A score
List of questions grouped into defects, mistakes and symptoms of failure with associated scores
61
A score > 25
Could be heading for failure
62
Symptoms of overtrading (4)
- Rapid increase in sales revenue - Rapid increase in volume of current assets - Only small increase in equity capital - Dramatic movement in debt and liquidity ratios
63
Reducing overtrading (3)
- Injecting new capital from shareholders - Improving working capital management through better control of inventories and trade receivables - Abandon ambitious plans and focus on consolidating position
64
Causes of overtrading (3)
- Seeking to increase revenue too rapidly without adequate capital - Repayment of loan without replacement - In a period of inflation, retained profits may be insufficient

ICAS - AFin (21 decks)

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