Introduction to Finance-3.pptx

8/20/2019 Introduction to Finance-3.pptx

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Introduction to Finance

WEEK 3

INTERPRETATION OF FINANCIALSTATEMENTS

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Learning Outcomes

• Understand the uses of ratio analysis

• Calculate the accounting ratios and

interpret the results

• Understand the limitations of ratio

analysis

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Ratio Analysis

Purpose%• T $#&ide a 'uic( a!d #e)ati&e)* +i,$)e ,ea!+

- e.a,i!i!" te -i!a!cia) ea)t - a 0u+i!e++

&e# a $e#id - ti,e• T $#&ide a $e#-#,a!ce c,$a#i+! 0etee!

c,$a!* a!d it+ c,$etit#+ # te i!du+t#*

a&e#a"e• T $#&ide a c,$a#i+! - te -i!a!cia) ea)t

- di--e#e!t 0u+i!e++


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Types of Ratios

5 main categories:

• Liuidity ratios a!a)*e te +#t4te#,

)i'uidit* - te 0u+i!e++ ie6 te a0i)it* - te -i#,t $a* it+ de0t e! te* -a)) due

• Profita!ility a!a)*e te #etu#!+ ,ade !

+a)e+ a!d ca$ita) i!&e+ted• "fficiency ratios 4 a!a)*e e--ecti&e)* a!d

e--icie!t)* te c,$a!* u+e+ it+ #e+u#ce+


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Types of Ratios

• #earing a!a)*e te )!"e# te#, )i'uidit* -te -i#, tat i+ #e)ated t it+ )!" te#, de0t+ &+e'uit*$ Te #ati+ i!dicate te -i!a!cia) #i+( -

te -i#,• In%estor ratios $#&ide i!-#,ati! a+ t

ete# te i!&e+t#+ i!&e+t,e!t+ a#e#ea+!a0)* +ecu#e i! te -i#,


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LI&UI'IT( RATIO)

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Current Ratio

• S,eti,e+ ca))ed te *or+ing capital ratio # !an+ers, ratio$

• It ,ea+u#e+ a c,$a!*+ a0i)it* t $a* it+ cu##e!t)ia0i)itie+

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Current Ratio

• Current Ratio =

Current Assets : Current Liabilities

• F# e.a,$)e% A #ati - 5%1 u)d i,$)* te -i#, a+

; 5 - a a++et+ t c&e# e&e#* ;1 i!)ia0i)itie+• T i" Mi"t +u""e+t tat t ,uc - it+ a++et+

a#e tied u$ i! u!$#ducti&e acti&itie+ t ,uc+tc(

• T ) #i+( - !t 0ei!" a0)e t $a* te )ia0i)itie+

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Current Ratio

Cu##e!t A++et+

Cu##e!t Rati < Cu##e!t Lia0i)itie+

2=11 2=1=

Cu##e!t A++et+ ;55=6=== ;5336===

Cu##e!t Lia0i)itie+ ;21=6=== ;2736===

Cu##e!t Rati 29 22

;55=6=== ;5336===

;21=6=== ;2736===


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Acid Test Ratio

• A)+ #e-e##ed t a+ te ?&uic+ ratio• A #ati tat ,ea+u#e+ te @i!+ta!t de0t4$a*i!"

a0i)it* - a c,$a!*


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Quick RatioQuick Ratio

Use: To indicate instant debt-paying ability.

The ratio excludes inventory as time is

needed to convert inventory to cash

Use: To indicate instant debt-paying ability.

The ratio excludes inventory as time is

needed to convert inventory to cash

2010 2009

Quick assets:

Cash $ 90,500 $ 64,700

Marketable securities 75,000 60,000Debtors 115,000 120,000

Total $20,500 $244,700

Curre!t liabilities $210,000 $24",000

Quick ratio 1#" 1#0

ci% Test Ratio


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Acid Test Ratio

• (Current assets – stock) :Current liabilities

• 1%1 +ee! a+ idea)

• A #ati - 3%1 te#e-#e u)d +u""e+t te -i#, a+ 3ti,e+ a+ ,uc ca+ a+ it e+ &e#* ea)t*B

• A #ati - =5%1 u)d +u""e+t te -i#, a+ tice a+ ,a!*)ia0i)itie+ a+ it a+ ca+ t $a* -# t+e )ia0i)itie+ Ti+

might $ut te -i#, u!de# $#e++u#e


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PROFITA-ILIT( RATIO)


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Profitability i+ te a0i)it* - a! e!tit* t ea#! $#-it+

Ti+ a0i)it* t ea#! $#-it+ de$e!d+ ! te e--ecti&e!e++a!d e--icie!c* - $e#ati!+ a+ e)) a+ #e+u#ce+a&ai)a0)e

Profitability analysis -cu+e+ $#i,a#i)* ! te#e)ati!+i$ 0etee! $e#ati!" #e+u)t+ #e$#ted i! tei!c,e +tate,e!t a!d #e+u#ce+ #e$#ted i! te 0a)a!ce+eet


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Profita!ility Analysis


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Profita!ility Ratios

Rati+ i!c)ude%

4 G#++ $#-it ,a#"i! 4 O$e#ati!" $#-it ,a#"i!

4 Net $#-it ,a#"i! 4 Retu#! ! ca$ita) e,$)*ed

4 Retu#! ! e'uit*


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#ross Profit .argin

A++e++ ,uc de+ te c,$a!* ea#! -#,$#duci!" a ; - +a)e+

A "#++ ,a#"i! - 55 ,ea!+ tat -# e&e#* ; - +a)e+6te -i#, ,a(e+ 55 ce!t+ - "#++ ,a#"i! A!d ti+,a#"i! "e+ i!t c&e#i!" te $e#ati!" c+t+ - te -i#,

Te )a#"e# te "#++ $#-it ,a#"i!6 te 0ette# -# tec,$a!*

Te ca)cu)ati! i+% #ross Profit/0et )ales 1 22223Dt te#,+ c,e -#, te c,$a!*+ i!c,e +tate,e!t


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Operating Profit .argin

• A)+ (!! a+ ea#!i!"+ 0e-#e i!te#e+t a!d ta.EDITa!d i+ -u!d ! te c,$a!*+ i!c,e +tate,e!t

• Te ca)cu)ati! i+% "-IT/0et )ales 1 222223• Te $e#ati!" $#-it ,a#"i! #ati i+ a ,ea+u#e - &e#a))

$e#ati!" e--icie!c*6 i!c#$#ati!" a)) - te e.$e!+e+ -#di!a#*6 dai)* 0u+i!e++ acti&it*


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0et Profit .argin

• Mea+u#e+ $#-ita0i)it* a-te# c!+ide#ati! - a)) e.$e!+e+i!c)udi!" ta.e+6 i!te#e+t6 a!d de$#eciati! F# e.a,$)e6i- te !et $#-it ,a#"i! i+ 56 tat ,ea!+ tat 5 ce!t+ -e&e#* d))a# i+ $#-it

• Te ca)cu)ati! i+% 0et Profit/0et )ales 1 222223• We! di!" a +i,$)e $#-ita0i)it* #ati a!a)*+i+6 !et $#-it

,a#"i! i+ te ,+t -te! ,a#"i! #ati u+ed


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Return on Capital "mployed

• Mea+u#e+ te #etu#!+ t a)) +u$$)ie#+ - )!"4te#, -i!a!cei! te c,$a!*

• Te ca)cu)ati! i+% "-IT/Capital "mployed 1 222223• Ca$ita) e,$)*ed i+ +a#e ca$ita) H #e+e#&e+ H )!" te#,

)a!+ It i+ ta(e! -#, te 0a)a!ce +eet• EDIT i+ ea#!i!"+ 0e-#e deducti!+ -# i!te#e+t $a*a0)e

t )e!de#+6 di&ide!d+ t +a#e)de#+ a!d ta. t "&t


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Return on "uity

• Mea+u#e+ te #etu#! ! te ,!e* te +a#e)de#+ a&e $uti!t te c,$a!* Ti+ i+ te #ati $te!tia) i!&e+t#+ )( ate! decidi!" ete# # !t t i!&e+t i! te c,$a!*

• Te ca)cu)ati! i+%• 0et Profit after ta4 and preference di%idend if any /

Ordinary )hare Capital and reser%es <

Sa#e)de#+ e'uit* c,e+ -#, te 0a)a!ce +eet•

Ge!e#a))*6 te i"e# te $e#ce!ta"e6 te 0ette#6 it +,ee.ce$ti!+6 a+ it ++ tat te c,$a!* i+ di!" a "d J0u+i!" te i!&e+t#+ ,!e*


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"FFICI"0C( RATIO)

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"fficiency Ratios

E.a,i!e te a* i! ic &a#iu+#e+u#ce+ - te 0u+i!e++ a#e ,a!a"ed

Rati+ i!c)ude%

4 A&e#a"e +tc( tu#!&e# $e#id

4 A&e#a"e de0t# c))ecti! $e#id

4 A&e#a"e c#edit#+ $a*,e!t $e#id


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A%erage )toc+ Turno%er Period

• T a++e++ te e--icie!c* i! te ,a!a"e,e!t - +tc(+I!dicate+ te )e!"t - ti,e it ta(e+ t ac'ui#e6 +e)) a!d#e$)ace te i!&e!t#*

• Te #ati i+ ca)cu)ated a+% A&e#a"e +tc( e)d .395 da*+C+t

- +a)e+

e#e a&e#a"e +tc( i+ $e!i!" H c)+i!" +tc(/2

A )e# +tc( tu#!&e# $e#id i+ $#e-e##ed a+ -u!d+ tiedu$ i! +tc( ca!!t 0e u+ed -# te# $u#$+e+

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A%erage 'e!tors Collection Period

T a++e++ te e--icie!c* i! c))ecti!" de0t+ a!d i! te

,a!a"e,e!t - c#edit

Te #ati i+ ca)cu)ated a+% T#ade e0t#+ . 395 da*+

C+t - +a)e+

e#e t#ade de0t# i+ $e!i!" H c)+i!" de0t# /2

C,$a#i!" ti+ #ati it te c#edit te#,+ $#&ide

i!-#,ati! ! te e--icie!c* i! c))ecti!" #ecei&a0)e+

a+ ti+ a+ +i"!i-ica!t i,$act ! ca+ -) -

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A%erage Creditors Payment Period

• A++e++ )!" ! a&e#a"e 0u+i!e++ ta(e+ t $a*c#edit#+

• Te #ati i+ ca)cu)ated a+% T#ade C#edit#+ . 395 da*+C#edit

Pu#ca+e+

e#e t#ade c#edit# i+ $e!i!" H c)+i!" c#edit# /2 I- 0u+i!e++ #e"u)a#)* $a*+ )ate6 te +u$$)ie# ,i"t

itd#a c#edit


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#"ARI0# RATIO)


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#earing

•

i+ te #e)ati!+i$ - de0t -u!di!" t e'uit* -u!di!" i! ac,$a!*

• Gea#i!" ca! 0e ,ea+u#ed i! a &a#iet* - a*+6 a!d te#e i+ !!e &e#+i! tat i+ a0+)ute)* acce$ted

• A c,,!)* u+ed ,ea+u#e i+%

L!" te#, )ia0i)itie+ . 1==

Sa#e ca$ita) H #e+e#&e+ H )!" te#, )ia0i)itie+ A! e--ect - "ea#i!" i+ tat #etu#!+ t e'uit* 0ec,e ,#e

+e!+iti&e t ca!"e+ i! $#-it+ F# a i")* "ea#ed c,$a!*6

a ca!"e i! $#-it+ ca! )ead t a $#$#ti!ate)* "#eate#ca!"e i! te #etu#!+ t e'uit* te#e-#e6 te#e i+ i"e# #i+(

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Interest Co%er Ratio

• Mea+u#e+ te a,u!t - $#-it a&ai)a0)e t c&e# i!te#e+t$a*a0)e

•

Te ca)cu)ati! i+% "-IT/ Interest Paya!le < ti,e+• Te )e# te )e&e) - $#-it c&e#a"e te "#eate# te #i+(

t )e!de#+ tat i!te#e+t $a*,e!t i)) !t 0e ,et


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I06")TOR)/ )7AR"7OL'"R)RATIO)

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)hareholders, Ratios

• A $#i,e c!ce#! - +a#e)de#+ i+ tei# #etu#!! i!&e+t,e!t

• Te #etu#!+ -#, i!&e+ti!" i! +a#e+ - a

c,$a!* c,e i! t ,ai! -#,+% 4 Te $a*,e!t - di&ide!d+ ut - $#-it+

4 Te i!c#ea+e i! te &a)ue - te +a#e+

+a#e $#ice c,$a#ed it te $#ice tat te +a#e)de# #i"i!a))* $aid -# te

+a#e+


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)hareholders, Ratios

a#iu+ #ati+ a#e a&ai)a0)e tat a#e de+i"!ed te)$ i!&e+t#+ a++e++ te #etu#!+ ! tei#i!&e+t,e!t

Rati+ i!c)ude % 4 i&ide!d $e# +a#e PS 4 i&ide!d ie)d

4 Ea#!i!"+ $e# +a#e EPS

4 P#ice Ea#!i!"+ #atiP/E

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'i%idend Per )hare

• P#&ide+ a! i!dicati! - te ca+ #etu#! a! i!&e+t##ecei&e+ -#, )di!" +a#e+ i! te c,$a!*

• Te ca)cu)ati! i+%

Total di%idend paid/0o of ordinary shares issued <

$e# +a#e• E"6 a -i#, $aid ut te -))i!" di&ide!d+• 2=11% ;>2=6===•

2=1=% ;78=6===• I! 0t *ea#+6 te#e e#e 16===6=== ;1 #di!a#* +a#e+

i! i++ue ic 'ua)i-ied t #ecei&e a di&ide!d

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'i%idend Per )hare

• Te di&ide!d $e# +a#e u)d 0e%• 2=11% ; >2=6=== / 16===6=== +a#e+ < ;=>2 # >2c

$e# +a#e•

2=1=% ;78=6=== / 16===6=== +a#e+ < ;=78 # 78c$e# +a#e• A! #di!a#* +a#e)de# u)d $#0a0)* 0e $)ea+ed it

te i"e# di&ide!d $e# +a#e i! 2=11c,$a#ed it

2=1=

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'i%idend Per )hare

• e&e#6 te $#0)e, it di&ide!d $e# +a#e i+ tat te#ati )ac(+ a +e!+i0)e c!te.t We d!t (!%

• ,uc te +a#e)de# $aid -# te +a#e+ ieat te di&ide!d ,ea!+ i! te#,+ - a #etu#! !i!&e+t,e!t

• ,uc $#-it $e# +a#e a+ ea#!ed ic might a&e 0ee! di+t#i0uted a+ a di&ide!d



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'i%idend (ield

• Re)ate+ te ca+ #etu#! -#, a +a#e t it+ cu##e!t ,a#(et&a)ue e)$+ i!&e+t# a++e++ te ca+ #etu#! ! tei#i!&e+t,e!t i! te c,$a!*

• Te #ati i+% i& $e# +a#e

Ma#(et &a)ue $e# +a#e

• A -i#, dec)a#ed te -))i!" di&ide!d $a*,e!t+% >2c 2=11a!d 78c 2=1=

•

Te a&e#a"e +a#e $#ice -# 1 #di!a#* +a#e - te c,$a!*! te Stc( E.ca!"e du#i!" t+e -i!a!cia) *ea#+ a+;1715 2=11 a!d ;1=9: 2=1=



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'i%idend (ield

• +i!" te -#,u)a6 te di&ide!d *ie)d u)d 0e%• >2/1715 -# 2=11 < 95• 78/1=9: -# 2=1= < 75

• S te di&ide!d *ie)d i! 2==> i!c#ea+ed6 ic i+ "d!e+ -# +a#e)de#+ +i!ce tat #e$#e+e!t+ a! i!c#ea+ei! tei# #etu#! ! i!&e+t,e!t

• Wat e d!t (! i- ete# te +a#e)de#+c!+ide# it t 0e a! acce$ta0)e #etu#! -# te $e#cei&ed#i+( i!&e+ti!" i! te +a#e+ - te 0u+i!e++



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"arnings per share 8"P)9

• Re"a#ded 0* ,a!* i!&e+t,e!t a!a)*+t+ a+ a-u!da,e!ta) ,ea+u#e - +a#e $e#-#,a!ce

• Ca)cu)ated a+%

Net P#-it a&ai)a0)e t #di!a#* +a#e)de#+

N - #di!a#* +a#e+ i! i++ue

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2011 2010

&ar!i!'s (er share $1#64 $1#"5

)et (ro*it a*ter ta+ $ 91,000 $ 76,500

ess (re*erre% %i-i%e!%s 9,000 9,000

)et (ro*it a-ail#, *or .r%# /# $ 2,000 $ 67,500

.r%i!ar /hares 50,000 50,000

Use: To assess the profitability of theinvestment by ordinary shareholders.

Use: To assess the profitability of theinvestment by ordinary shareholders.

&ar!i!'s er /hare


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Price "arnings ratio 8P/"9

• Ti+ e.i0it+ i!&e+t#+ c!-ide!ce ! a $a#ticu)a# +a#e

•

A i" P/E Rati i!dicate+ a i" )e&e) - c!-ide!ce i!te -utu#e ea#!i!" $e# - te c,$a!* a!dc!+e'ue!t)* i!&e+t#+ a#e i))i!")* t $a* ,#e i!#e)ati! t te ea#!i!"+ +t#ea, - te c,$a!*

• P/" ratio1 Current share price/ "P)

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Use: To indicate future earnings

prospects, based on the relationship between market value of ordinary

share and earnings.

Use: To indicate future earnings

prospects, based on the relationship

between market value of ordinary

share and earnings.

2011 2010

rice3ear!i!'s ratio o! share 25 20

Market (rice (er share $41#00 $27#00

&ar!i!'s (er share 1#64 1#"5

rice3 &ar!i!' Ratio


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LI.ITATIO0) OF RATIOA0AL()I)

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LI.ITATIO0) OF RATIO A0AL()I)

• Rati+ te!d t #ai+e 'ue+ti!+ #ate# ta! a!+e# te, Te*i")i"t te -i!a!cia) +t#e!"t+ a!d ea(!e++e+ - a0u+i!e++ 0ut te* ca!!t e.$)ai! * te+e e.i+t

•

Rati+ ca)cu)ated de$e!d+ ! te 'ua)it* - te -i!a!cia)+tate,e!t Ga#0a"e I! Ga#0a"e Out

• Rati+ +a*+ )itt)e a0ut te +ie - $e#ati!+ E.a,$)e C A"e!e#ate+ ;1, $#-it a!d a&e a ROCE - 15 a!d C D ,a*

"e!e#ate ;1==6=== $#-it a!d a&e a ROCE - 2= A)tu"C D a+ a i"e# )e&e) - $#-ita0i)it* a+ ,ea+u#ed 0* ROCE6it "e!e#ate+ )e# tta) $#-it i! a0+)ute te#,+

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LI.ITATIO0) OF RATIO A0AL()I)

• A)tu" te -i!a!cia) +tate,e!t+ - ,+t c,$a!ie+ a#e$#e$a#ed i! acc#da!ce it I!te#!ati!a) Accu!ti!"Sta!da#d+ IAS te#e i+ +ti)) c!+ide#a0)e )atitude i! #e$#ti!"-i!a!cia) $+iti! e"6 accu!ti!" $)icie+6 -i!a!ci!" $)icie+a!d -i!a!cia) *ea# e!d+6 Te+e i)) a--ect te #e)ia0i)it* - te

c,$a#i+!+ 0etee! -i#,+

• Da)a!ce +eet #ati+ a#e 0a+ed ! a $i!t i! ti,e - tec,$a!* Te#e-#e6 it ,a* !t 0e #e$#e+e!tati&e - te-i!a!cia) $+iti! - te c,$a!* -# te *ea# a+ a )e

• A!* a!a)*+i+ - i+t#ica) accu!ti!" +tate,e!t+ a#e 0ac(a#d)(i!" eci+i!+ a#e a0ut te -utu#e a!d te#e-#e #e'ui#ei!-#,ati! tat i+ -#a#d )(i!"

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