Please enable JavaScript.
Coggle requires JavaScript to display documents.
Reading 26: Analysing financial performance - Coggle Diagram
Reading 26: Analysing financial
performance
1.Financial performance -techniques and tools
1.1 Simple returns
1.1.1. Return on equity/return on capital employed
Formula
Information needed:
1-Opening balance (or equity at the beginning of the year).
2-Closing balance (or equity at the end of the year).
3-Change in value of bank balance or equity.
Return on equity / capital employed
increase in the value of that investment over time
1.1.2 Gross margin
Gross profit/Sales x 100%
MARKED UP RATIO
by dividing an item's gross profit by its cost
questions about results
gross margin improved?
matter of concern?
possible reasons?
CAUSES OF DECREASE
selling prices may have reduced
planned reduction in selling prices
cost prices increased
Or one element under the cost
an unplanned increase
external economic factor
change ‘sales mix’
if fewer high-margin installed in previous year
1.1.3 Return on sales – operating profit margin
calculating
Operating profit / Sales x 100%
Questions to ask
operating profit margin improved?
matter of concern?
possible reasons?
1.2 Conclusion on simple returns
‘rules of thumb’ based on these ratios
provide a basis for planning
Financial health of a business
2.1 The ‘quick ratio’ (or ‘acid test’)
How much cash is (or will soon be available)
formula
(Current assets – inventory)/current liabilities
Questions:
good news or not?
got better or worse?
If the answer is less than 1:1
obligations higher than cash
depend on sector
1:1 is absolute minimum
2:1 – or even 2.5:1 –
in high-turnover, low margin businesses.
1.2:1 in industrial companies
2.2 Receivables collection period
How long it takes on average, to collect debts
formula
(Receivables / Sales) x 365
question about results
reasonable time to be waiting?
trending – better or worse?
What to do to improve
2.3 Inventory turnover period
How long, on average, inventory is held
formula
(inventory/cost of goods sold) x 365
inventory control system
‘just in time’ system
ordering when is required
question to ask on results
why are they being stored ,not used or returned ordisposed ,
actual cost of this new storage
have been taken into account?
seem a reasonable time to hold?
trending – better or worse?
What to do to improve
2.4 Gearing (or ‘leverage’)
proportion of business funding based on debt
‘Highly geared’
using a high level of long-term debt
highly volatile
formula
long-term liabilities / equity x100
2.5 Conclusion on financial health