Transcript Document

OHT 6.1
Analysing and interpreting financial
statements
OBJECTIVES
You should be able to:
Identify the major categories of ratios that can be used
for analysis purposes
Calculate important ratios for determining the financial
performance and position of a business and explain the
significance of the ratios calculated
Explain the importance of gearing to a business and its
owners
Discuss the limitations of ratios as a tool of financial
analysis
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.2
Financial ratio classification
Categories
Profitability
Efficiency
Liquidity
Gearing
Investment
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.3
Profitability ratios
Formula
Return on ordinary
shareholders’ funds
Net profit after taxation and preference dividend (if any) x 100
Ordinary share capital + Reserves
Return on capital
employed
Net profit before interest and taxation
x 100
Share capital + Reserves + Long-term loans
Net profit margin
Gross profit margin
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Net profit before interest and taxation
Sales
Gross profit
Sales
x 100
x 100
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.4
Efficiency ratios
Formula
Average stock
turnover period
Average stock held
Cost of sales
Average settlement
period for debtors
Trade debtors
Credit sales
Average settlement
period for creditors
x 365
x 365
Trade creditors x 365
Credit purchases
Sales to capital
employed
Sales
Long-term capital employed
Sales per employee
Sales
Number of employees
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.5
The main elements comprising the
ROCE ratio
Net profit before
interest and taxation
sales
multiplied by
Sales
Long-term capital
employed
equals
Return on capital
employed
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.6
Liquidity ratios
Formula
Current ratio
Current assets
Current liabilities (creditors due within one year)
Acid test ratio
Current assets (excluding stock)
Current liabilities
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.7
Gearing ratios
Formula
Gearing ratio
Long-term liabilities
Share capital + Reserves + Long-term liabilities
Interest cover
ratio
Profit before interest and taxation
Interest payable
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.8
The effect of financial gearing
Profit before
interest and tax
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.9
Investment ratios
Formula
Dividend payout
ratio
Dividend yield ratio
Dividends announced for the year x 100
Earnings for the year available for dividends
Dividend per share/(1- t)
Market value per share
x 100
Earnings per share
Earnings available to ordinary shareholders
Number of ordinary shares in issue
Price/earnings ratio
(P/E)
Market value per share
Earnings per share
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.10
Average dividend yield ratios for
businesses in a range of Industries
6.32
6
5.15
5
4.42
4.29
3.98
3.67
3.35
3
Banks
Electricity
Food and drug
retailers
Leisure
and hotels
Transport
Tobacco
Pharmaceuticals
and biotechnology
Engineering and
machinery
Chemicals
Oil and gas
0
Construction and
building materials
2.85
2
1
3.16
Real estate
4
4.35
4.83
4.52
Source: Constructed from data appearing in the Financial Times, 18 January 2003
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.11
Average price/earnings ratios for
businesses in a range of industries
30
22.86
22.63
16.77
Banks
Real estate
12.67
Electricity
Food and drug
retailers
Transport
12.54
Pharmaceuticals
and biotechnology
Chemicals
Oil and gas
0
Construct. and
building materials
8.45
10
12.93 14.06
Leisure
and hotels
12.87
Tobacco
15
5
23.18
18.83
18.62
20
Engineering and
machinery
25
Source: Constructed from data appearing in the Financial Times, 18 January 2003
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition
OHT 6.12
Graph plotting current ratio against
time
Current
ratio
XYZ Ltd
Industry
average
2000
2001
2002
2003
2004
Time
© Pearson Education Limited 2003
Atrill, McLaney: Accounting and Finance for Non-Specialists, 4th edition