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Interpretation of Financial Statements (Ratio Analysis (Profitability…
Interpretation of Financial Statements
Why perform financial analysis?
Useful for decision-making
Useful for comparing to competitors
Useful for different users (e.g. lenders, investors, governments)
Types of Analysis
Horizontal Analysis
% change from one year to the next
Can be compared to competitors
Vertical Analysis
Expressed as a % of a key component
Compare companies of different sizes
Cash Flow Analysis
Cash flow management
Meet obligations?
Operating Activities
Test quality of profit - OCF vs SPL
Investing Activities
Is NCA being replaced?
Financing Activities
How is money being raised?
What is it being used for?
Ratio Analysis
Profitability
Effectiveness in generating profits
ROCE
ROE
NPM
GPM
Liquidity
Ability to meet liabilities
Current ratio
Quick ratio
Efficiency
Effectiveness of use of assets
Inventory turnover
Receivables collection period
Payables payment period
Working capital cycle
Gearing
Financial structure
Capital gearing
Debt-to-equity ratio
Interest cover
Investor/Stock Market
Returns to investors
EPS
IAS 33
P/E ratio
Dividend cover
Dividend yield
Limitations of Ratio Analysis
Based on historical information
Influenced by reliability of financial statements
Do companies have comparable accounting policies?
No 'normal' levels
Doesn't consider inflation
The CORE Approach
Context
Overview
Ratios
Evaluation