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Accounting > Week 4 & 5 - Analysis of Financial Statements 2 > Flashcards

Week 4 & 5 - Analysis of Financial Statements 2 Flashcards

1
Q

What is a ratio and what is it important to compare it to?

A

1) Two numbers, with one expressed as a ratio (or percentage) to the other,
• from Income Statement, and/or Statement of Financial Position

2)
- Trend over time
- Benchmarking to industry, competitors etc.
- Comparison to target or expectation

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2
Q

What are the five areas for ratio analysis?

A
  1. Profitability
  2. Liquidity, i.e. cash flow
  3. Gearing, i.e. the proportion of borrowings to shareholders investment
  4. Efficiency of use of assets
  5. Shareholder returns
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3
Q

What is the following ratio analysis about:

Profitability

A

increasing rates of profit on shareholders’ funds, capital and sales

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4
Q

What is the following ratio analysis about:

Liquidity, i.e. cash flow

A

adequate liquidity to ensure debts can be paid, but not such that funds are inefficiently used

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5
Q

What is the following ratio analysis about:

Gearing

A

debt commensurate with the business risk taken

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6
Q

What is the following ratio analysis about:

Efficiency of use of assets

A

efficiency through using investments to maximise sales

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7
Q

What is the following ratio analysis about:

Shareholder returns

A

a satisfactory return on the investment made by shareholders

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8
Q

What are the profitability ratios?

A
  1. Return on (shareholders’) investment (ROI)
  2. Return on capital employed (ROCE)
  3. Operating margin (Operating profit/sales)
  4. Gross margin (Gross profit/sales)
  5. Overhead/sales
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9
Q

What are the liquidity ratios?

A
  1. Working capital
  2. Acid test (or quick ratio)
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10
Q

What are the gearing ratios?

A
  1. Gearing
  2. Interest cover
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11
Q

What are the Activity/efficiency ratios?

A
  1. Asset turnover
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12
Q

Formulae for ROI:

A
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13
Q

Formulae for ROI

and what does it stand for

A

Return on investment

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14
Q

Formulae for ROCE

And what does it stand for?

A

Return on capital employed

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15
Q

Formulae for Operating profit/sales

A
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16
Q

Formulae for Gross profit/sales

A
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17
Q

Formulae for Overhead/sales

A
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18
Q

Formulae for Working capital

What is the level of the ratio that most companies seek?

A

150% (/1.5) - balancing efficiency and risk of not paying debt

19
Q

Formulae for Acid test (quick):

And what is the level that companies seek?

A

100% (/1)

20
Q

Formulae for Gearing

What level do companies seek?

A

Many seek 40%-60%

21
Q

Formulae for Interest cover

A
22
Q

Formulae for Asset turnover

A
23
Q

Which to areas are (according to professor) key areas of analysis?

A
  1. Gearing
  2. Working Capital
24
Q

Why are Gearing and Working Capital key areas of analysis?

A

Why?

  • Risk
  • Return

• Cash

25
Q

Explain consequences of different debt/equity mix

A
26
Q

Explain the working capital cycle

A
27
Q

How can you manage working capital?

A
  1. Managing receivables through effective credit approval, invoicing and collection activity;
  2. Managing inventory through effective ordering, storage and identification of stock;
  3. Managing payables by negotiation of trade terms and through taking advantage of settlement discounts; and
  4. Managing cash by effective forecasting, short-term borrowing and/or investment of surplus cash where possible.
28
Q

What are the two formulaes to evaluate the managing of receivables and inventory?

A

DSO (Days Sales outstanding)

Stock turn

29
Q

What is the formulae for DSO (Days sales outstanding)?

A

=number of days of sales that have still not been paid to us

30
Q

What is the formulae for Stock turn?’

Do you want it to be high or low?

A

= renew stock every XXth day

low

31
Q

What is the name of the ratio to evaluate the managing of payables?

Do you want it to be high or low?

A

Days’ purchases outstanding

high

32
Q

What is the formulae to calculate Days’ purchases outstanding (DPO)?

Do you want it to be high or low?

A

high

33
Q

What are the shareholder return ratios?

A
  1. Dividend per Share
  2. Dividend Payout Ratio
  3. Dividend Yield
  4. Earnings per share
  5. Price/Earnings (P/E)
34
Q

What’s the formulae for

Dividend Payout Ratio

A
35
Q

What’s the formulae for

Dividend per Share

A
36
Q

What’s the formulae for

Dividend Yield

A
37
Q

What’s the formulae for

Earnings per share

A
38
Q

What’s the formulae for

Price/Earnings (P/E)

A
39
Q

What is important to remember when interpreting profitability ratios?

A
  • Increased profits (more sales, higher margins, lower costs) or lower capital
  • Higher profit (in £s) is not the same as a higher rate of profit (the % to sales)
  • Improved rate of gross profit may be the result of higher selling prices, lower cost of sales or changes in product mix (or any combination of these)
40
Q

When interpreting liquidity, what is important to remember?

A

• Improvements are the result of changing the balance between current assets and current liabilities

  • May be improved by long-term borrowing
  • Repaying long-term debt will reduce liquidity
41
Q

What is important to remember when interpreting gearing ratios?

A

1) Gearing

• Affected by more shares being issued, new borrowings or repayment of debt

2) Higher profits will improve interest cover

42
Q

What is important to remember when interpreting activity/efficiency ratios?

A

• Improved due to increase in sales or reduction in assets. Efficient collection of debtors and management of inventory.

43
Q

When interpreting shareholder return ratios, what is important to remember?

A
  • Paying higher dividends may lead to borrowings for capital investment, but lower dividends are not favoured by investors
  • Share price is a result of market expectations about the company’s future
  • An increase in the number of shares will also affect these ratios

Accounting (6 decks)

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