Lecture 6 (Analysing Annual reports) Flashcards
What is the difference between Cash and Profit
Whilst a lot of the focus is normally around the ‘profitability’ of an organisation,this must not be confused with Cash
Organisations cannot trade on profit terms – they must trade on cash terms
Cash is real, you can see it, you can spend it, you can touch it.
Profit is not real. It is the ‘stuff’ that is left after all expenses for a period have been deducted from incomes for that given period
What is an Annual report?
The annual report is a document that public corporations must provide annually to shareholders reporting on the performance and activities of the company during the financial year
Analysis of annual reports are undertaken to satisfy the needs of different stakeholder groups
Understanding annual reports is crucial for a number of reasons:
Assessing financial health
Transparency and Accountability
Benchmarking & Comparative Analysis
Strategic Decision making
Compliance & Regulatory Requirements
What is the difference between Superficial Analysis Horizontal and Ratio?
Superficial - Often quite qualitative, makes use of the written reports from within the annual report from the chairman, directors
Horizontal - line-by-line comparison of accounts for a set number of years (Usually using numerical difference or % changes)
Ratios - formulas to relate 1 thing to another: often in 4 key areas, 1) profitability, 2) liquidity, 3) defensive position, 4) investment ratio
What is Growth?
Identifies year on year changes to analyse how the organisations have progressed over a period of time
Formula = (this year - last year)/ last year x 100
Why use ratio analysis?
It is a fundamental financial tool used to evaluate and interpret financial performance/profitability.
Describes the relationship between values/data points
Define Profitability Ratio and what is it used for?
a financial metric or ratio used to evaluate and measure the effectiveness, efficiency, or overall performance of a business or organisation in various aspects of its operations
Because these are often expressed as a percentage, it is possible to compare the profitability/performance of two or more businesses regardless of size
Performance ratios can vary widely in their focus and application, depending on the specific aspect of performance being analysed.
To make a profit, a company has to ensure that it sells goods/and/or services at a higher price than the cost of producing them
What is Profitability?
a measure of the organisations ability to make a profit
Define Gross Profit ratio (include formula)
Financial metric represents the difference between a company’s total revenue from sales and the cost of goods sold (COGS)
It’s the profit coming from the core business operations before deducing other expense
Gross profit (sales-cost of sales)/Turnover x 100
Define Operating profit (include formula)
Profit before interest and taxes (PBIT)
This ratio shows operating profit per £1 of turnover that a business has been able to earn during an accounting period
This will be after all of the other business expenses have been deducted and therefore is will be much lower than gross profit
PBIT/turnover x 100
