Week 21-22: Analysing and Interpreting Financial Statements Flashcards
What is financial ratio analysis?
It is a technique used to evaluate a company’s financial performance and position by analyzing relationships between different financial statement figures
Why is financial ratio analysis important?
It helps assess profitability, efficiency, liquidity, and financial stability, aiding investors, managers, and creditors in decision-making
What are the key categories of financial ratios?
Profitability, efficiency, liquidity, financial gearing, and investment ratios
Why is comparison important in financial analysis?
Comparing ratios over time or against industry benchmarks helps detect trends, strengths, and weaknesses
What is the purpose of profitability ratios?
To measure a company’s ability to generate profit relative to revenue, assets, or shareholders’ equity
What is the formula for Return on Capital Employed (ROCE)?
ROCE=
(CapitalEmployed
/OperatingProfit)
×100
How do you calculate Gross Profit Margin?
GrossProfitMargin=
(SalesRevenue
/GrossProfit)
×100
What does the Operating Profit Margin measure?
The percentage of revenue that remains after deducting operating expenses but before interest and taxes
What is the formula for Return on Ordinary Shareholders’ Funds (ROSF)?
ROSF=
(NetProfitafterTaxandPreferenceDividends/OrdinaryShareholders’Equity)
×100
What do efficiency ratios measure?
They assess how effectively a company utilizes its assets and manages liabilities
How do you calculate Inventory Turnover Ratio?
InventoryTurnover = (Cost of Sales/Average Inventory)
What does a higher Inventory Turnover Ratio indicate?
Faster inventory movement, reducing holding costs and risk of obsolescence
What is the Average Collection Period (Trade Receivables Turnover)?
AverageCollectionPeriod = (Trade Receivables / Credit Sales)
×365
It shows how long customers take to pay
How do you calculate the Trade Payables Settlement Period?
TradePayablesPeriod= (Trade Payables/Credit Purchases) ×365
It indicates how long a company takes to pay suppliers
What do liquidity ratios assess?
A company’s ability to meet short-term obligations
What is the Current Ratio formula?
CurrentRatio= Current Assets/Current Liabilities
How is the Acid-Test Ratio different from the Current Ratio?
The Acid-Test Ratio excludes inventory from current assets, as inventory may not be easily liquidated
What is the formula for the Acid-Test Ratio?
Acid-TestRatio= ((Current Assets - Inventory)/Current Liabilities)
What does a low liquidity ratio indicate?
It may suggest financial difficulties in paying short-term obligations
What is financial gearing?
The extent to which a business is financed by debt compared to equity
How is the Gearing Ratio calculated?
GearingRatio = (Non-current Liabilities/Equity + Non-current Liabilities) ×100
What does a high gearing ratio imply?
High financial risk due to dependence on borrowed funds
What is the Interest Cover Ratio?
It measures a firm’s ability to cover interest expenses with operating profit.
Formula:
Interest Cover = (Operating Profit/Interest Expense)
Why are investment ratios important for investors?
They help assess the attractiveness of a company as an investment opportunity
