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Financial Reporting L15/L16/L17 20/11/17 :<3: (Who is interested in…
Financial Reporting L15/L16/L17 20/11/17 :<3:
Who is interested in financial statements
Customers
Regulators
Employees
Suppliers
Government
Lenders
Share holders
Financial ratio
Allows comparison of risk and return
Assists user in their decisions
A window appraising past performance as a basis for judging likely future performance
Classification
Profitability: an insight to degree of success in creating profit and owners' interest
Efficiency: measure the efficiency with which resources have been used
Liquidity: assess ability to meet obligations (liabilities) as they fall due
Solvency/ gearing: measure degree of risk and give an insight into how the business is funded
Investment: assess returns and performance of the business
Profitability ratios
Margin
Operating profit margin: [(revenue - cost of sales - operating costs) / revenue]*100%
Net profit margin: (net profit / revenue)*100%
Gross profit margin: [(revenue - cost of sales) / revenue]*100%
Return
Return on total assets: [operating profit / (non current assets + current assets)]*100%
Return on shareholders funds: (profit after tax / equity)*100%
Return on Capital Employed: [operating profit / (equity + long term debt)]*100%
A decrease in gross profit margin
Increase in cost of sales
Both a fall in sales price and an increase in cost of sales
Fall in sales price
Efficiency ratios for resources used by the business: express how well we are using our assets and employees
Working capital
Inventory (Stock) days: (inventory / cost of sales)*365 days
Receivables days: (receivables /
sales
)*365 days
Payables days: (payables / cost of sales)*365 days
Total assets - asset turnover ratio: [sales / (non current + current assets)]*100%
People - sales revenue per employee: sales / number of employees
Liquidity Ratios: Inventory is not easily convertible to cash
Current ratio: current assets / current liabilities
Quick ratio: (current assets - inventory) / current liabilities -> excluding physical assets such as stock
Cash flow statements: intended to provide information on liquidity, viability and adaptability
Solvency / Gearing: relevant when a business is financed, at least partly, by borrowing -> important indicator of risk
Gearing ratio: [current plus non current debt / (current plus non current debt + equity)]
100 or (current plus non current debt / equity)
100
Interest cover ratio: profit before interest and tax / interest (also called finance costs or net finance costs)
Investor ratios
Earning per share: net profit / number of ordinary shares(average)
Price / Earnings ratio: current share price / earnings per share
Dividends per share: total dividend to ordinary shareholders / number of ordinary shares
Dividend yield: (dividend per share / current share price)*100%
Limitations of ratio analysis
Not the full story
Context is important to interpretation
Benchmarks
Other analytical tools
Qualitative disclosures
Multivariate analysis of ratios
Comparative analysis
Disaggregation of ratios