Transcript Document

Slide 3.1
Chapter 3
Analysing and interpreting financial statements
LEARNING OUTCOMES
You should be able to:
Identify the major categories of ratios
that can be used for analysis purposes
Calculate key ratios for assessing the financial
performance and position of a business and explain
the significance of the ratios calculated
Discuss the use of ratios in helping to predict
financial failure
Discuss the limitations of ratios as a tool of
financial analysis
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.2
The key aspects of financial health
Profitability
Financial
ratios
Investment
Efficiency
Liquidity
Financial
gearing
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.3
Ratios benchmarks
Ratios may be compared with:
Past periods
Similar businesses for the
same period
Planned performance
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.4
Profitability ratios
Return on ordinary shareholders’ funds (ROSF)
Profit for the year less any preference dividend × 100
Ordinary share capital + Reserves
Return on capital employed (ROCE)
Operating profit × 100
Share capital + Reserves + Non-current liabilities
Operating profit margin
Operating profit
Sales revenue
× 100
Gross profit margin
Gross profit × 100
Sales revenue
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.5
Operating profit margin %
BA’s operating profit margin
10
Target
5
0
–5
2006
2007
2008
2009
2010
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.6
Efficiency ratios
Formula
Average inventories
turnover period
Average inventories held
Cost of sales
× 365
Average settlement
period for receivables
Average trade receivables
Credit sales revenue
× 365
Average settlement
period for payables
Average trade payables
Credit purchases
× 365
Sales revenue to
capital employed
Sales revenue________________
Share capital + Reserves + Non-current liabilities
Sales revenue per
employee
Sales revenue
Number of employees
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.7
The main elements of the ROCE ratio
Operating profit
Sales revenue
multiplied
by
Sales revenue
Long-term capital employed
equals
Return on capital employed
Source: P. Atrill and E. McLaney, Accounting and Finance for Non-Specialists, 7th edn, Financial Times
Prentice Hall, 2010, p. 206.
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.8
Liquidity ratios
Formula
Current ratio
Current assets
Current liabilities
Acid test ratio
Current assets (excluding inventories)
Current liabilities
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.9
Gearing ratios
Formula
Gearing
ratio
Long-term (non-current) liabilities
× 100
Share capital + Reserves + Long-term (non-current) liabilities
Interest cover
ratio
Operating profit
Interest payable
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.10
Investment ratios
Formula
Dividend payout
ratio
Dividends announced for the year × 100
Earnings for the year available for dividends
Dividend cover
ratio
Earnings for the year available for dividend
Dividends announced for the year
Dividend yield
ratio
Dividend per share/(1 – t )
Market value per share
× 100
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.11
Investment ratios (Continued)
Formula
Earnings per
share
Price/earnings
ratio (P/E)
Earnings available to ordinary shareholders
Number of ordinary shares in issue
Market value per share
Earnings per share
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.12
4
4.30
Average for all SE
listed businesses
Beverages
Life insurance/
Assurance
Electricity
Food and Drug
Retailers
Media
Tobacco
Travel and leisure
5
Pharmaceuticals
and biotechnology
Industrial
engineering
Chemicals
6
Construction
and materials
%
Oil and gas
Average dividend yield ratios for businesses in
a range of industries
5.22
4.45
4.25
4.23
4.14
3
2
2.18
3.12
2.96
2.81
2.65
2.62
2.19
1
0
Source: Constructed from data appearing in the Financial Times, 3/4 April 2010
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.13
21.78
Average for all SE
listed businesses
Beverages
Life insurance/
Assurance
Electricity
Food and Drug
Retailers
Media
Tobacco
Travel and leisure
20.0
Pharmaceuticals
and Biotechnology
28. 79
Industrial
engineering
25.0
Construction
and materials
30.0
Oil and gas
19.07
17.34 17.17
15.0
15.58
17.73
17.20
15.11
14.10
12.77
12.31
10.0
5.0
11.31
Chemicals
times
Average price/earnings ratios for businesses
in a range of industries
0
Source: Constructed from data appearing in the Financial Times, 3/4 April 2010
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.14
Graph plotting current ratio against time
Current ratio
0.9
J. Sainsbury plc
0.8
0.7
Tesco plc
0.6
0.5
William Morrison
plc
0.4
0.3
0.2
0.1
2002
2003
2004
2005
2006
2007
2008
2009 2010
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.15
Average (mean) ratios of failed and non-failed businesses
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.16
Scatter diagram showing the distribution of
failed and non-failed businesses
Failed businesses
Current
ratio
Non-failed businesses
ROCE ratio
Source: P. Atrill and E. McLaney, Accounting: An Introduction, 7th edn, Financial Times Prentice Hall, 2009.
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.17
The Z score model
Z=
0.717a + 0.847b + 3.107c + 0.420d + 0.998e
where:
a = Working capital/Total assets
b = Accumulated retained profits/Total assets
c = Operating profit/Total assets
d = Book (statement of financial position) value
of ordinary and preference shares/Total liabilities
at book (statement of financial position) value
e = Sales revenue/Total assets
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 3.18
Limitations of ratio analysis
Quality of financial statements
Creative accounting
Inflation
Over-reliance on ratios
The basis for comparison
Statement of financial position
ratios
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012