Flashcards
Interpreting published accounts
Cards in this deck (14)
- 1Ratio analysisA technique for analysing a business's financial performance by comparing one piece of accounting information into another
- 2Types of ratios* Profitability
* Financial efficiency
* liquidity and gearing
* Shareholders ratios - 3Profitability ratiosnet profit margin- this ratio measures relationship between the net profit and the level of turnover on sales made
{F} Net Profit margin= net profit/revenue X 100
ROCE - also called the primary ratio and it measure the efficiency of the business in using its capital to generate profits
{F} ROCE= operating profit/total capital employed X 100
* higher the figure for these ratios the better - 4Financial efficiency ratiosAsset turnover= revenue/net assets employed
this measures the efficiency at which the business makes use of its assets
Inventory (stock) turnover- cost of goods sold/average inventories
Inventory turnover= average inventories X 365/cost of goods sold
Average inventories= (opening inventories+closing inventories)/2 - 5Receivables collection periodreceivables collection period=receivables X 365/ revenue (expressed as days)
- 6Payables collection periodPayables collection period= payables X 365/ revenue (expressed as days)
- 7Liquidity ratiosCurrent ratio
acid test ratio
gearing - 8Current ratioCurrent ratio= current assets : current liabilities
(A firm wants to operate at 2:1) - 9Acid test ratioAcid test= liquid assets (current assets-inventories): current liabilities
(a normal ratio might be between 0,6:1 and 1,1:1) - 10GearingGearing measures the proportion of capital employed by the business that is provided by long-term lenders against the proportion that has been invested by the owners
{F} Gearing=non-current liabilities/total capital employed X 100 - 11Shareholders RatiosDividend per share (DPS)
Dividend Yield - 12Dividend per shareThis ratio is the total dividend declared by a company divided by number of shares the business has issued
{F} DPS= total dividends/number of total shares - 13Dividend yieldThis is the dividend per share (for the entire year) expressed as a percentage of the market price of the share
{F} Dividend yield = dividend per share/market share price X 100 - 14Drawbacks of the ratio analysis* It is retrospective - concentrates on past performance and is not forward looking
* Different companies might use different accounting policies
*Provides no information about non-financial matters such as state of the market, the morale of the workforce
*It doesnt take into account the effect inflation may have on reported figures
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- Flashcards on Interpreting published accounts, created by barbare.rukhadze on 31/03/2015.
- Created by
- barbare.rukhadze · Mar 2015
- Updated
- Feb 19, 2016
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