Ratio Analysis
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Ratio Analysis

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Ratio Analysis Ratio Analysis Presentation Transcript

  • FINANCIAL RATIOS AND MEASURES REVIEW
  • RATIO ANALYSIS Ratios can be used as indicators of business health or impending problems. There are two main approaches to ration analysis: Vertical Comparison of figures within one financial period. Horizontal Comparison of figures from different financial years.
  • UNDERSTANDING RATIOS
        • Ratios must be interpreted after considering the economic and industrial conditions applying to the organisation.
        •                
        • Ratios should be compared over time to determine the factors that have caused changes in the results and determine specific trends.
        •               
        • Ratios should be compared to a reasonable performance indicator (KPI).
        •                
        • Ratios can assist to performance analyse any item or sub total in a profit & loss.
  • GROSS MARGIN % Measures the adequacy of trading profit or margin Gross Profit --------------- X 100 Revenue
  • PROFITABILITY % Critical measure of operational performance before tax and interest EBIT --------------- X 100 Revenue
  • COST OF SALES FIXED COSTS VARIABLE COSTS TAX SALES GROSS PROFIT CONTRIBUTION.. EBIT NET PROFIT R I Earnings Before Interest and Tax DIVIDENDS PROFIT BEFORE TAX INTEREST OUTPUT TAX SHAREHOLDERS BANK EBIT
  • NET PROFIT TO SALES Measures the final net profit rate after tax and interest Net Profit --------------- X 100 Revenue
  • PROFIT MANAGEMENT P roduct Y ield S ervice O ptimum Volume C ontrol of Costs P S Y C O
  • ACCOUNTS RECEIVABLE COLLECTION RATE Measures Accounts Receivable Collection Rate X 365 Appropriate Time Period Accounts Receivable ------------------ Revenue
  • ACCOUNTS PAYABLE COLLECTION RATE Measures Accounts Payable Payment Period X 365 Accounts Payable ------------------ COGS
  • INVENTORY TURNOVER Measures the level of inventory turnover (Shelf Life of Stock) Average Inventory = Opening Inventory + Closing Inventory 2 X 365 Inventory ------------------ COGS
  • CURRENT RATIO Basic test of the ability to pay debts Working Capital % = Accs Rec. + Inventory – Accs Pay./ Revenue * 100 * Time Period Current Assets ------------------ Current Liabilities
  • ASSET TURNOVER RATE How much in sales are generated from each $1 of capital invested in net assets Sales --------------- Net Assets
  • _ CASH FLOW A negative amount shows that cash flow has increased. funds from one period To the next Short Term + Long Term Debt (This period) Short Term + Long Term Debt (Last Period) Measures The change in externally borrowed
  • To get a To Get a R eturn O n C apital E mployed Or ROCE WHY GO INTO BUSINESS?
  • Equity = Assets - Liabilities Shareholders funds Retained Profits & reserves Fixed assets Debtors Inventory Other current assets Bank overdraft Other short term debt (eg lease, Hire purchase & taxation Liabilities) Cash Creditors THE ACCOUNTING EQUATION
  • THE ACCOUNTING EQUATION Net Debt + Equity = Total Operating Assets (Capital Employed) How the Business How the funds are is funded = applied in the business
  • = Capital Employed Net Assets DEBT CAPITAL + EQUITY CAPITAL Operating Working Capital NON-CURRENT ASSETS + Bank Loans Bank Overdraft Leases Hire Purchase Share capital Retained Income Reserves Other Equity Funding Accounts Receivables Inventories Other Current Assets (Accounts Payables) Investments Intangibles Buildings Plant Equipment FINANCE OPERATIONS
  • X COMPONENTS OF ROCE X 100 Measures Balance Sheet Management Revenue Net Operating Assets EBIT Revenue Measures Profit and Loss Management
  • R ETURN ON CAPITAL EMPLOYED (R OCE )
    • One measure that combines both profit and loss management and balance sheet performance
    • Is measured before any financing cost to enabl e comparison s to be made with the average cost of finance
    • Is critical to the assessment of value creation