Interpreting published accounts

Interpreting published accounts

1. Liquidity - A business's ability to meet short term cash payments on time

   • Current ratio - a measure of the ability to meet short term debts
   • Acid test ratio - a measure of the ability to meet short term debts from liquid assets

2. Profitability - The relationship between business's profits and sales revenues

   • Operating profit margin - Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc
   • ROCE - a measure of how efficienty a business is using its capital to generate profits

3. Financial efficiency ratios

   • Asset turnover - a measure of how effectively a business is using its assets to generate sales
   • Capital employed - Total equity + non current liabilities. Total capital invested in the business from long term sales

4. Inventory turnover - a measure of how many times per year a business turns over its stock through sales

5. Payables days - Average number of days to pay suppliers

6. Debtors days - Average number of days to be paid by customers etc

7. Gearing ratio - the percentage of capital employed that comes from non current liabilities

8. Shareholder ratios - ratios that help to measure the value of the return received by shareholders

9. Dividend per share - the number of pence per share receive by shareholders

10. Dividend yield - a measure of the return received on an investment as a percentage of the current market prices of the share

11. POSITIVE ... gives structure to any financial data

    • NEGATIVE... could have been manipulated