Unit 3 Accounts & Finance Ratio Analysis

Learning Objectives To be able to calculate ratios To be able to use ratios to interpret and analyse financial statements from the perspective of various stakeholders HL – To evaluate the possible financial and other strategies to improve the values of ratios

Accounting Ratios Five main groups of ratios Profitability ratios – Gross Profit Margin – Net Profit Margin – ROCE – Mark-up Liquidity ratios – Current Ratio – Acid Test Ratio Financial efficiency ratios – Stock (inventory) Turnover Ratio – Debtor Days Ratio – Creditor Days Ratio Shareholder or investment ratios – Dividend Yield Ratio – Earnings per share ratio Gearing ratios – Gearing Ratio Key word – Efficiency How well a firm is using its resources

SHAREHOLDER / INVESTMENT RATIOS

Shareholder Returns There are two parts to the returns earned by shareholders

Shareholder Returns Dividend The share of the profits paid to shareholders as a return for investing in the company Dividend The share of the profits paid to shareholders as a return for investing in the company Higher Share Price The quoted price of one share on the stock exchange Higher Share Price The quoted price of one share on the stock exchange Paid out of profits Realised when shares are sold

Dividend Yield Ratio Measures the rate of return a shareholder gets at the current share price Dividend Yield Ratio (%) = Dividend per share Current share price X 100

Dividends 2010 ($m) Number of shares (m) Dividend per share ($) Market share price 31/12/10 ($) Dividend yield (%) Nairobi press Ltd $1.50 Port Louis Press Ltd $10.00 ? Dividend per share = Total annual dividends Total number of issued shares

Note… If share price rises, with an unchanged dividend, dividend yield will fall If an increased dividend is proposed, but share price doesn’t change, then dividend yield will increase This rate of return can be compared with other investments and dividend yields from other companies Resluts needs to be compared with previous years too

Earnings Per Share Ratio Measure the amount that each share is earning for the shareholder This can be compared with other companies’ data Earnings per share = Profit after tax Total number of shares