Chapter 26 : Analysis of accounts
Analysis of published accounts
limited companies publish account to public
available to those interested in the performance of the business
to tell whether a business is
performing better this year than last year
performing better than other businesses
ratio analysis
comparing two figures from the accounts to asses how a business is performing (profitability and liquidity)
Concept and Importance of profitability
profitability = profit ❌
profitability = measurement of profit made relative to either:
- the value of sales achieved
- the capital invested in the business
profitability = measure of efficiency
PROFITABILITY RATIOS
1. Return on Capital Employed (ROCE)
formula :
net profit ÷ capital employed x 100
= ROCE %
2. Gross Profit Margin
formula :
gross profit ÷ revenue x 100
= gross profit margin %
3. Net Profit Margin
formula :
net profit ÷ revenue x 100
= net profit margin %
the higher the result, the more successful the managers are in earning profit
% increase :
- prices have been increased by more than the cost of sales has risen.
- costs of sales has been reduced.
the higher the result, the more successful the managers are in earning profit
Concept and Importance of liquidity
business cannot pay its short-term debts, they are called illiquid.
LIQUIDITY RATIOS
1. Current Ratio
formula :
current assets ÷ current liabilities
= current ratio
2. Acid Ratio
formula :
(current assets - inventories) ÷ current liabilities