Professional Documents
Culture Documents
WEEK 3
INTERPRETATION OF FINANCIAL
STATEMENTS
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Learning Outcomes
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Ratio Analysis
Purpose:
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Types of Ratios
5 main categories:
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Types of Ratios
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LIQUIDITY RATIOS
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Current Ratio
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Current Ratio
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Current Ratio =
Current Assets : Current Liabilities
For example: A ratio of 5:1 would imply the firm has
$ 5 of a assets to cover every $1 in
liabilities.
Too high Might suggest that too much of its assets
are tied up in unproductive activities too much
stock.
Too low risk of not being able to pay the liabilities.
Current Ratio
Current Assets
Current Ratio = Current Liabilities
2011
Current Assets
Current Liabilities
Current Ratio
$550,000
$210,000
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2010
$550,000
$210,000
2.6
2.2
$533,000
$243,000
$533,000
$243,000
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2010
2009
$ 90,500
75,000
115,000
$280,500
$210,000
1.3
$ 64,700
60,000
120,000
$244,700
$243,000
1.0
Use:
Use: To
Toindicate
indicate instant
instant debt-paying
debt-paying ability.
ability.
The
The ratio
ratio excludes
excludes inventory
inventory as
as time
time isis
needed
needed to
to convert
convert inventory
inventory to
to cash
cash
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PROFITABILITY RATIOS
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Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness
and efficiency of operations as well as resources
available.
Profitability analysis focuses primarily on the
relationship between operating results reported in the
income statement and resources reported in the balance
sheet.
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Profitability Ratios
Ratios include:
- Gross profit margin
- Operating profit margin
- Net profit margin
- Return on capital employed
- Return on equity
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Return on Equity
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EFFICIENCY RATIOS
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Efficiency Ratios
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GEARING RATIOS
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Gearing
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INVESTORS/ SHAREHOLDERS
RATIOS
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Shareholders Ratios
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Shareholders Ratios
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Dividend Yield
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Dividend Yield
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Calculated as:
Net Profit available to ordinary shareholders
No of ordinary shares in issue
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2011
$ 91,000
9,000
$ 82,000
50,000
$1.64
2010
$ 76,500
9,000
$ 67,500
50,000
$1.35
Use:
Use: To
Toassess
assess the
the profitability
profitability of
of the
the
investment
investment by
by ordinary
ordinary shareholders.
shareholders.
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2011
$41.00
1.64
25
2010
$27.00
1.35
20
Use:
Use: To
Toindicate
indicate future
future earnings
earnings
prospects,
prospects, based
based on
on the
the relationship
relationship
between
between market
market value
value of
of ordinary
ordinary
share
share and
and earnings.
earnings.
LIMITATIONS OF RATIO
ANALYSIS
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The end
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