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Purpose and users of financial statement analysis - Coggle Diagram
Purpose and users of financial statement analysis
Financial statement analysis is set of quantitative techniques to extract relevant financial information from financial statement for decision-making purposes
Why analyse financial statements?
Financial statements contain useful information
To most external users, financial statements are one of the most accessible sources of information about an entity
Who uses ratios and why?
Present and potential investors
Investment decisions, need information on:
risk and return on investments
ability of entity to pay dividends
Employees
Assess their employer's stability and profitability
Assess their employer's ability to provide remuneration employment opportunities, retirement and other benefits
Customers
Assess whether the company will continue in existance
Management
Run the company on behalf of the shareholders
Must have as much insight into the ratios as possible
Governments and their agencies
Assess allocation of resources and therefore activities of the company
Assess taxation
Provides basis for national statisitcs
The public
Assess trends and recent developments in the company's prosperity and its activities
Lenders
Assess whether loans will be repaid
Suppliers and other trade payables
Assess the likelihood of being paid when due
What type of financial analysis is there?
Vertical analysis
Expressing financial statements figures as a % of one key figure
Used when dealing with changing scale
Allows users to compare the sign and magnitude of movements
Ratio analysis
Ratio is the relationship between two figures, which can be expressed as a proportion, a fraction or as a percentage
Ratio analysis is a numerical technique to summarise and interpret financial stamtenets by re-expressing the financial statements data in ratio form
Other words it is an attempt to reduce accounting information in to a more usable figures
Horizontal/trend analysis
analysing financial statements figures over several time periods
Useful when trying to track long-term trends
Shows the % changes from year to year
Provides users with a quick indication about the sign of the movements (+/-)
Other
Comparison - Benchmarking
When using the ratios the financial analyst will need to make a comparison with a benchmark
For example - compare ratios for two or more accounting past periods and look at the change
Continued:
Industry averages
We can compare ratios to the industry average
Budgeted or forecast V's actual
Has current activity matched that planned?
Competitors in the same industry
We compare ratios to another company (competitor) in the same industry
Categories of ratios
Liquidity ratios (short term)
Solvency ratios (long term(
Efficiency ratios
Investor ratios
Profitability ratios (management performance)
Purpose to assess the relative success or failure of business performance (especially in terms of profitability)
Ratios:
Return on capital employed (ROCE)
Operating profit / capital employed x100
Operating profit = earnings before interest and tax
Capital employed = equity + non current liabilities
Operating profit margin
operating profit / sales revenue x100
Shows return earned by the business from its operating activities ( profit before interest and tax) as % of sales
Return on shareholders' funder (ROSF)
profit for the year less preference dividends / ordinary share capital + reserves x 100
Higher percentage indicates efficient utilisation of equity
Gross profit margin
gross profit / sales revenue x100