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Week 9: Interpretation of FinancialStatements
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An attempt by users toevaluate the financialinformation of an
organisation in order tomeasure theperformance of thoseorganisationsThis evaluation isusually done throughratio analysis
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Users Yardsticks of comparison
Areas of analysis
Ratio analysis
Interpret results
Write report
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Shareholders Loan creditors
Employees
Analysts & advisers
Business contacts
Government Public
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Past performance
Budgeted Performance
Industrial Sector Performance
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Before carrying out any ratio analysis,review the financial statements for any
major movements. Where relevant, calculate the major %
movements.
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Profitability ratios Short-term solvency ratios
Efficiency ratios Long-term solvency ratios
Investment ratios
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Company B : Sales revenue 200,000; profit 6,000Company C : Sales revenue 300,000; profit 4,500
Which of the 3 organisations is best?That depends on what the user is looking for.Looking for:
Highest revenue?....................... = company CHighest profit?............................ = company BMost successful in terms of profit?...... = company A (half level of sales of B, but only 1,000 less profit)
We are now starting comparison we are comparingprofit with sales revenue, and we are comparing one firmwith another.
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It might also be useful to compare the profit withother figures, apart from sales.Suppose that the capital employed in company Ais 50,000.A profit of 5,000 is a 10% return on that capital.
Suppose that company Cs capital employed isonly 30,000.Its return on that capital is 15% So, an investor might prefer to choose company Cwhile a lender might prefer company B.
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http://www.majestic2.co.uk/results2011.pdf
http://www.mulberry.com/about/PDF/Investor/Mulb
erryGroupPLC_AnnualReport_2011.pdf
http://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/pyke0207.pdf
http://www.majestic2.co.uk/results2011.pdfhttp://www.mulberry.com/about/PDF/Investor/MulberryGroupPLC_AnnualReport_2011.pdfhttp://www.mulberry.com/about/PDF/Investor/MulberryGroupPLC_AnnualReport_2011.pdfhttp://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/pyke0207.pdfhttp://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/pyke0207.pdfhttp://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/pyke0207.pdfhttp://www2.accaglobal.com/pubs/students/publications/student_accountant/archive/pyke0207.pdfhttp://www.mulberry.com/about/PDF/Investor/MulberryGroupPLC_AnnualReport_2011.pdfhttp://www.mulberry.com/about/PDF/Investor/MulberryGroupPLC_AnnualReport_2011.pdfhttp://www.majestic2.co.uk/results2011.pdf7/31/2019 %28fv%29lecture Slides %28mb Version%29 %28tue 011111170p%29
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PROFITABILITY RATIOS
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How much profit per of sales the
business makes after deducting
the direct production costs from the
selling price?
Gross Profit / Revenue
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2010
Gr. Profit 60-----Revenue 180
= 33.3%
2009
Gr. Profit 64------Revenue 160
= 40.0%
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How much, per of sales, the
business spends on selling,
distribution and administrationexpenses?
Operating expenses / Revenue
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2010
Op Exp 40
------Revenue 180
= 22.2%
2009
Op Exp 30
------Revenue 160
= 18.75%
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How much profit per of sales thebusiness makes after all expenses
(other than finance costs) havebeen deducted?
Profit before interest and tax / Revenue
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2010
Op Profit 20
------Revenue 180
= 11.1%
2009
Op Profit 34
------Revenue 160
= 21.25%
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How much return per on the longterm capital invested in the
business?Profit before interest and tax /Capital employed (CAPITAL EMPLOYED = Share capital +Reserves + Long term (non-current) liabilities)
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2010
OP 20
----Cap Emp 98
= 20.4%
2009
OP 34
----Cap Emp 92
= 36.9%
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SHORT-TERM SOLVENCY RATIOS
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How many times do the entitys current assets cover its current
liabilities?
Current assets / Current liabilities(times)
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2010
CA 85
----CL 73
= 1.16 times
2009
CA 37
-----CL 33
= 1.12 times
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2010
CA - inventories 61
----CL 73
= 0.84 times
2009
CA inventories 23
-----CL 33
= 0.7 times
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EFFICIENCY RATIOS
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How many days does it take thecompany to collect the cash
from its credit sales?
Trade receivables / Revenue X 365 (days)
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2010
Trade recbles 60 365
----- X -----Revenue 180 1
= 122 days
2009
Trade recbles 20 365
----- X -----Revenue 160 1
= 46 days
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How many days does it take thecompany to pay its short-term
suppliers for credit purchases?
Trade payables / Cost of sales X 365 (days)
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2010
Trade Paybles 62 365
----- x -----Cost of sales 120 1
= 189 days
2009
Trade Paybles 10 365
----- X -----Cost of sales 96 1
= 38 days
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LONG-TERM SOLVENCY RATIOS
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What % of the long-term capitalinvested in the business is
borrowed monies?(Gearing ratio = Long-term (non-current)
liabilities
------------------------------------Share capital + Reserves +Long-term (non-current) liabilities)
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2010
Non-current liabilities 20-----
Capital Employed 98
= 20.4%
2009
Non-current liabilities 20-----
Capital Employed 92
= 21.7%
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How many times does theoperating profit cover the net
finance costs?Profit before interest and tax / interestcharges (times)
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2010
Oper Profit 20--------
Finance costs 1
= 20 times
2009
Oper Profit 34-------
Finance costs 1
= 34 times
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What % of our assets would weneed to cash in to settle all our
liabilities?
Total Debt / Total Assets (%)
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2010
Total Liabs 93
-----Total Assets 171
= 54.4%
2009
Total Liabs 53
-----Total Assets 125
= 42.4%
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Dividend per share------------------------------- X 100Market value per share
2010: 11.67p / 1.50 = 7.78%
2009: 16.67p / 2.50 = 6.67%
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Profit attributable to ordinary shareholders-------------------------------------------------------- penceNumber of ordinary shares
2010: 13,000,000 / 60,000,000 = 21.67p
2009: 18,000,000 / 60,000,000 = 30p
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Market value per share------------------------------- timesEarnings per share
2010: 1.50 / 21.67p = 6.92 times
2009: 2.50 / 30p = 8.33 times
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Need 3 to 4 years of figures to establish trends. Valid comparisons can only be made between
firms of similar size and activity.
Ratios relate to a particular point in time.Seasonal factors can distort them.
When comparing with other companies, ensurethat the bases upon which the ratios have beencalculated are the same.