Week 6 - Financial Statement Analysis

Question 1

What is Purpose of RATIO ANALYSIS

Answer 1

• uses Financial & Non Financial Data,
• Making Comparisons
• Helping to Remove Impact of Scale and Inflation
• to Help Users of Financial Statements to Make Informed Decisions

Question 2

What are the 4 Main RATIO ANALYSIS TYPES?

Answer 2

• PROFITABILITY Ratios - aim Judging how Wel the Company is being Run by Management
• LIQUIDITY Ratios - aims Judgement of the Adequacy of Company’s Cash and near cash resources
• EFFICIENCY Ratios - Information of Speed Company Transforms Purchased into Sales and then into Cash
• GEARING Ratios - Measurement of Company’s Financial Risk

Question 3

What are 3 PROFITABILITY RATIOS + formulas

Answer 3

• GP MARGIN: GP/SR x100 -> higher the better
• OP MARGIN: OP/SR x100 -> higher the better
• RETURN on CAPITAL EMPLOYED : OP / (EQUITY + NCL) x100 -> higher the better

Question 4

What are 2 LIQUIDITY RATIOS + formulas

Answer 4

CURRENT RATIO: CA/CL –> higher better –> helps understand whether there’S Sufficient Short Term Assets To Settle Short-Term Liabilities. Below 1 = cash flow problems, Hgh Ratio = too much working capital

ACID TEST RATIO: (CA - INVENTORY) / CL -> higher better. more severe test, expected to be 1:1

Question 5

What 3 the Efficiency RATIOS Formula’s (Trade Receivable Settlement Period, Trade Payabale Settlement Period and Inventory Holding Period)

Answer 5

Trade Receivable Settlement Period: TRADE RECEIVABLE / SR x365 (lower better)

Trade Payable Settlement Period: TRADE PAYABLE / COST of SALES x365 (higher better)

Inventory Holding Period : INVENTORY / COST of SALES x365 (lower better)

Question 6

What are 2 GEARING RATIOS + formulas

Answer 6

GEARING RATIO = NCL / (Equity + NCL) x100
-> lower better –> % -
INTEREST COVER: OP / INTEREST EXPENSE –> expressed as a number of times -> higher better