搜索
M17EFA–FinancialStatementAnalysisandValuationInterpretationoffinancialstatementsusingratioanalysisLearningobjectives•Bytheendofthissessionstudentsshouldbeableto:–Calculateaccountingratiosforprofitability,liquidity,efficiency,capitalstructureandinvestors–UsetheseratiostoassesstheperformanceofacompanyovertimeCategoriesofratio•Ingeneralratiosarebrokenintofivegroupsdealingwith:•Profitability•Efficiency•Liquidity•Capitalstructure(gearing)•Investors•Someoverlapbetweentheseareas•RememberthatinordertomakeuseofratioswemusthavesomethingtocomparethemagainstLimitationsofratioanalysis•Financialstatementsarehistoricinnature(backwardratherthanforwardlooking/outofdate)•Comparisonofresultsmadedifficultby:•Useofdifferentaccountingpolicies•Oneoffitemsthatdistortresults(eg:largebaddebt,restructure,redundancy)•Definitionused(eg:ROCE,Gearing,capitalemployed)•Yearendbalancesnotalwaysrepresentativeofperiodasawhole(eg:highinventorylevelsbeforeXmas)•Ratioanalysismayindicateproblems,itwon’tnecessarilyrecommendsolutionsInterpretationtechnique•Suggestreasonswhyperformancehasimproved/declined•Useratiostosupportyouranalysis•Makeuseoffinancialstatementsprovidedaswellasratios(eg:makeupofCurrentassets/liabilitiesisoftenmoreusefulthanthecurrentratio/acidtest)•Makerecommendationsbasedonyouranalysis•Stateanylimitations/furtherinformationneeded•ItisnotnecessarytocalculateeveryratioInterpretationoffinancialstatementsusingratioanalysisDetailedexample-ContinentalRestaurantsplcAnnual%changeinrevenue-FormulaRevenuein20X5–Revenuein20X4x100Revenuein20X4Annual%changeinrevenue-Calculation20X47,026,484–6,566,805x100=7.0%6,566,80520X58,422,157–7,026,484x100=19.9%7,026,484Annual%changeinrevenue-Comments•Revenueduring20X5was19.9%higherthan20X4•Growthdueto:–Openingoftwonewrestaurants–ExistingrestaurantsbecomingestablishedandgainingloyalcustomerbaseProfitabilityratiosGrossprofitmargin(%)-Formula=GrossProfitx100%RevenueGrossprofitmargin(%)-Calculation20X4=4,279,904x100%=60.9%7,026,48420X5=5,211,238x100%=61.9%8,422,157Grossprofitmargin(%)-Comments•Onlytakesintoaccountcostofsales(eg:foodcosts)•In20X5,forevery£100ofsales,thecompanymakesagrossprofitof£61.90•Significantimprovementon20X4•Maybedueto:•Loyalcustomerbasehasallowedrestaurantstoincreaseprices•Changeinsalesmix•Increaseinsizeallowscompanytonegotiateimproveddiscountsfromsuppliers•MoreexperiencedstaffresultinginbetterportioncontrolandlesswasteProfitfromoperations(%)-Formula=Profitfromoperationsx100%RevenueProfitfromoperations(%)-Calculation20X4=1,260,216x100%=17.9%7,026,48420X5=1,513,358x100%=18.0%8,422,157Profitfromoperations(%)-Comments•Takesintoaccountcostofsalesandallotheroperatingexpenses•In20X5,forevery£100ofsales,thecompanymakesaprofitfromoperationsof£18.00•Alternativelyforevery£100ofsales,£82coversfoodcosts,wagesandotherexpenses,thebalanceisprofitfromoperations•Nosignificantimprovementon20X4despiteimprovementingrossprofitmargin•Maybedueto:•Failuretocontrolbusinessexpensesasnumberofrestaurantsexpands•Impactofoneoffcosts(eg:settingupnewrestaurants)•BreakdownofexpensesrequiredControlofstaffcosts-Formula=Staffcostsx100%RevenueControlofstaffcosts-Calculation20X4=1,150,639x100%=16.4%7,026,48420X5=1,460,166x100%=17.3%8,422,157Controlofstaffcosts-Comments•Indicateshowwellthecompanyiscontrollingemployeecosts•In20X5forevery£100ofsales,£17.30wasspentonwagesandsalaries•Increaseonpreviousyear,andthishasalmostwipedoutgainsarisingfromimprovementingrossprofitmargin•Maybedueto:–Shortageofskilledlabour–LocationofnewrestaurantsReturnonCapitalemployed(ROCE)(%)-Formula=Profitfromoperationsx100%Capitalemployed•Note:•Capitalemployed=shareholders’fundsandLTdebt•Severaldifferentdefinitionsofcapitalemployed-beconsistentROCE(%)-Calculations20X4=1,260,216x100%=21.6%5,078,210+750,00020X5=1,513,358x100%=22.7%5,914,134+750,000ROCE(%)-Comments•Indicateshowefficientlyanorganisationutilisesthelongtermfundsatitsdisposal•In20X5forevery£100oflongtermfundsinvested,thebusinessmadeareturnof£22.70•Significantimprovementon20X4•Comparewith:•Interestrate•ReturnsavailableelsewhereLiquidityratiosCurrentratio-Formula=CurrentAssetsCurrentLiabilitiesCurrentratio–Calculations20X4=2,954,210=7.6388,36420X5=2,416,669=9.2263,911Quickratio-Formula=CurrentAssets-InventoryCurrentLiabilitiesQuickratio-Calculations20X4=2,954,210–37,625=7.5388,36420X5=2,416,669–61,579=8.9263,911Liquidityratios-Comments•Whencommentingonliquidityalwaysconsiderthemakeupofcurrentassets(toomuchinventory/receivables?)•In20X5,forevery£1ofshorttermliabilities,thebusinesshad:–£9.20ofcurrentassets–£8.90ofquickassetsLiquidityratios-Comments•Withover£2millionincashthebusinesscurrentlyhasnoliquidityproblems•Howeverholdingsuchhugeamountsofcashfortoolongmayindicateaninefficientuseofbusinessresources•Becarefuloftextbook‘recommended’currentratioof2:1–McDonald’s,Tesco,ManUtdoperatewith0.2:1Useofassets/efficiencyratiosAssetTurnover-Formula=Revenue.CapitalemployedAssetturnover-Calculations20X4=7,026,484=1.215,078,210+750,00020X5=8,422,157=1.265,914,134+750,000Assetturnover-Comments•In20X5forevery