Performance Reporting Flashcards
Areas to consider when interrupting accounts?
User groups – who is interested in the info
What information does each group require?
What industry does the business operate in?
Comparability may be impaired as a result of
Degrees of diversification
Different production and purchasing policies
Different financing policies
Different accounting policies re NCA, inventories
Seasonality of the business
What are the main categories of ratios?
Profitability and Return
Long-term solvency and stability
Short-term solvency and stability
Efficiency (turnover ratios)
Shareholders’ investment ratios
What are 3 profitability and return ratios?
Operating profit margin=(Operating profit/ Revenue) x 100
Gross Profit margin = (Gross Profit / Revenue) x 100
Return on Capital Employed (ROCE)
What is ROCE?
Most important profitability ratio
(Profit before interest and Taxation / Capital Employed) x 100%
capital employed = shareholders equity plus non-current Liabilities (or total assets less current liabilities)
Used to analyse the movement in profit between years, and to make industry comparisons
What component parts should be looked at in a ratio analysis?
You can use Profit Margin
Net profit after tax
Net profit before tax
Profit before interest payable and finance costs
Gross profit
Look at these as a % of revenue
Look at growth between years
Look to see if any have changed disproportionately to each other and what the reasons might be. Has interest costs increased because the company has taken out loans in the year
What is asset turnover?
How well the assets of the business have been used to generate sales
Profit margin * asset turnover =
ROCE
High profit margin =
= higher profit per $1 of revenue, may mean sales price high. There is the possibility of sales rev is depressed and so asset turnover is lower
High asset turnover =
lots of sales but may have reduced prices
What is the debt ratio?
How much the company owes in relation to its size
Total debt (long and short) / total assets (equity or total assets less liabilities) *100
What Is the gearing ratio?
(Total prior charge capital / equity +Total prior charge capital ) *100
OR
(Total prior charge capital / equity) *100
What is leverage?
the proportion of assets financed by equity
Shareholders Equity / (Total assets - current liabilities)
What do you need to when holding equity shares in a highly geared company?
The degree of risk involved.
The higher the gearing the greater the risk that little funds will remain to pay out dividends
Important because if a company has high borrowing it may not be able to get more funds
Low profit companies may not be able to cover the interest payments
What is interest cover?
Shows whether a company is earning enough profit before tax and interest to pay the interest cost i.e. is interest high in relation to the size of profits?
= Profit before interest and tax
Interest charges
(in the exam you may have to calculate the profit before interest)
What are liquidity ratios?
= current assets
current liabilities
Ideally this ratio should be greater than one
What is Quick Ratio / Acid Test?
= current assets less inventory/ current liabilities
What is efficiency ratio?
Accounts Receivable Collection period
(Trade Receivables / Sales ) x 365
- need to consider the credit terms given to customers
Trend of the collection period over time
The industry the company operates in, collection period for a supermarket will very different to a manufacturer
In practice the trade receivables will include VAT but the sales figure will not
What is inventory days?
This calculates the average number of days that the inventory will be held for
(Inventory / cost of sales) *365
A lengthening inventory days can indicate?
Slowdown in trading
Build up inventory – perhaps suggesting that investment in inventory is excessive
Other aspects to consider
Lead times
Seasonal fluctuations
Alternative use of warehouse space
Bulk order discounts
Likelihood of stock becoming obsolete/perishing
What is accounts payable?
(Trade accounts payable) / (cost of sales/purchases) x 365
Link with discussion on cash-flow.
An increase could be the result of
- lack of long-term finance
- poor management of current assets
- extended use of credit from suppliers
What is investment ratios?
Earnings per share
What is Dividend cover?
Earnings per share / Dividend per ordinary share
What is Price Earnings Ratio?
Price / Earnings
The higher the investor confidence in the company the higher the P/E i.e. they expect high profit growth
What is dividend yield?
(Dividend on the share for the year / Current Market value for the share (ex-div) ) x 100%
What are the things to consider when analyising?
What is important to you? What are you concerned with when looking at this company
What ratios are of importance
Why
What is the ratio measuring
Looking at the ratios in isolation, what can you see?
What are the initial areas to investigate
What are you hoping to identify from your investigation
What areas of the financial statements that are of interest
Do the financial statements explain the ratio movement
How
What further information would be of use to help you in your analysis
Does the directors report/strategic report add any further information to your analysis?
What does it tell you?
What other non-financial information would you consider
Economic
Business
Industry
Limitations of financial analysis?
General = different/ change of accounting date and Window Dressing
Info = base info out of date, historic cost not appropriate for decision making, info in published accounts is generally summarised, analysis of accounts only identifies the symptoms not causes
Trend = effects of price change, impact of changes in technology, impact of changing environment, effects of change in accounting policies, problems associated with establishing a normal base year
Inter-firm = section of industry norms, different firms have different risk profiles, different accounting policies, impact of size of business and structure, impact of different environments on results i.e. different countries
