Analysis and interpretation Flashcards
Profitability; Gross profit margin
Revenue
What would an increase in gross profit margin indicate?
-higher selling prices
-lower purchase prices (perhaps from bulk buy discounts)
-change in the sales mix
Profitability; Operating profit margin
Revenue
Operating profit margin is considered to be more volatile than gross profit margin - why?
OP affected by more factors
Op costs are generally fixed so don’t tend to increase/decrease with revenue
Costs such as depreciation and impairment losses are heavily reliant on management judgement - therefore hinders the ability to compare OPM of one company to another
Profitability; ROCE
Capital employed
What is capital employed?
Equity plus interest bearing finance
What does ROCE measure? & what 4 things should it be compared to?
How efficiently an entity is using its resources
-previous years figures
-target ROCE
-ROCE of competitors
-cost of borrowing
Liquidity; Current ratio
Current liabilities
What does the current ratio measure? What is preferable in terms of higher or lower for the ratio? What happens is suggested if it is too high?
Whether an entity has sufficient current assets to meet its short term obligations. The higher the ratio, the more financially secure an entity is. If the ratio is too high then it may suggest inefficiencies in working capital management.
Liquidity; Inventory turnover period
Cost of sales
What does a high inventory turnover suggest?
-lack of demand for the entity’s goods
-poor inventory control
Liquidity; Receivables collection period
Credit sales
What does an increase in receivables collection suggest?
Lack of credit control which could lead to irrecoverable debts
Liquidity; Payables payment period
Credit purchases
What does payables payment period represent and what does a long credit period suggest?
Credit period taken by the company to pay its suppliers
Free source of finance
If too long, suppliers may reduce or withdraw credit facilities
