Week 4 & 5 - Analysis of Financial Statements 2 Flashcards Preview

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Flashcards in Week 4 & 5 - Analysis of Financial Statements 2 Deck (43)
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1

What is a ratio and what is it important to compare it to?

1)  Two numbers, with one expressed as a ratio (or percentage) to the other,
• from Income Statement, and/or Statement of Financial Position 

2) 

- Trend over time

- Benchmarking to industry, competitors etc.

- Comparison to target or expectation 

2

What are the five areas for ratio analysis?

  1. Profitability
  2. Liquidity, i.e. cash flow
  3. Gearing, i.e. the proportion of borrowings to shareholders investment
  4. Efficiency of use of assets
  5. Shareholder returns 

3

What is the following ratio analysis about:

Profitability 

 

increasing rates of profit on shareholders’ funds, capital and sales 

4

What is the following ratio analysis about:

Liquidity, i.e. cash flow 

adequate liquidity to ensure debts can be paid, but not such that funds are inefficiently used 

5

What is the following ratio analysis about:

Gearing 

debt commensurate with the business risk taken 

6

What is the following ratio analysis about:

Efficiency of use of assets 

efficiency through using investments to maximise sales 

7

What is the following ratio analysis about:

Shareholder returns 

a satisfactory return on the investment made by shareholders 

8

What are the profitability ratios?

  1.  Return on (shareholders’) investment (ROI)
  2. Return on capital employed (ROCE)
  3. Operating margin (Operating profit/sales)
  4. Gross margin (Gross profit/sales)
  5. Overhead/sales 

9

What are the liquidity ratios?

  1. Working capital
  2. Acid test (or quick ratio) 

10

What are the gearing ratios?

  1. Gearing
  2. Interest cover 

11

What are the Activity/efficiency ratios?

  1. Asset turnover

12

Formulae for ROI:

13

Formulae for ROI

and what does it stand for

Return on investment

14

Formulae for ROCE

And what does it stand for?

Return on capital employed

15

Formulae for Operating profit/sales

16

Formulae for Gross profit/sales 

17

Formulae for Overhead/sales 

18

Formulae for Working capital 

What is the level of the ratio that most companies seek?

150% (/1.5) - balancing efficiency and risk of not paying debt

19

Formulae for Acid test (quick): 

And what is the level that companies seek?

100% (/1)

20

Formulae for Gearing 

What level do companies seek?

Many seek 40%-60%

21

Formulae for Interest cover

22

Formulae for Asset turnover

23

Which to areas are (according to professor) key areas of analysis? 

  1. Gearing
  2. Working Capital 

24

Why are Gearing and Working Capital key areas of analysis? 

 Why?

• Risk
• Return

• Cash 

25

Explain consequences of different debt/equity mix

26

Explain the working capital cycle

27

How can you manage working capital?

  1. Managing receivables through effective credit approval, invoicing and collection activity;
  2. Managing inventory through effective ordering, storage and identification of stock;
  3. Managing payables by negotiation of trade terms and through taking advantage of settlement discounts; and
  4. Managing cash by effective forecasting, short-term borrowing and/or investment of surplus cash where possible. 

28

What are the two formulaes to evaluate the managing of receivables and inventory?

DSO (Days Sales outstanding)

Stock turn

29

What is the formulae for DSO (Days sales outstanding)?

=number of days of sales that have still not been paid to us

30

What is the formulae for Stock turn?'

Do you want it to be high or low?

= renew stock every XXth day

low