Gabrielle Moran 11th September 2010 Ratio Analysis

Around Christmas in 6th Year– depending?

Why prepare accounts at all? Ascertain profit Measure performance Other people

Users Shareholders/Owners Employees Suppliers Revenue Commissioners Managers Lenders Competitors

5 aspects Profitability and efficiency Liquidity/Solvency Working Capital Gearing Investment

Cross Reference Grid Users vs Aspect Why and what looking for

Each Ratio How to calculate (formula) What it tells us Expected trends/norms Compare with/ Relate to others?

© 2008

Profitability /Efficiency Liquidity/ Solvency Gearing Investment Working Capital Why? What? Lenders Potential Shareholders ShareholdersManagementCustomers © 2008

Formula 2 : 1 Expected Norms Acid Test Relate to Investment Ability to pay ST debts What it shows CA CL Working Capital © 2008

Three dimensions to topic Calculating – Murphy Interpretation – AAA, BB Definitions – Little Book

General approach to part b Calculate & recalculate if appropriate Figures given from previous year – Be Aware Comment on Trend Norms Relation to other ratios Relation to interest rates Sector

Part C Don’t forget!!! Mini part B – giving advice opportunity to buy share To company Discuss rising liquidity ratio is a sign of prudent management Gross profit % changing explain

Methods for learning formulae  Daily test -- immunity  Dominos  Follow me  Bingo  Little Booklet (pass definitions)

Methods for tackling part (b)  Place mat  Tri Pie  Cross ref chart

Follow me ….

Current Ratio Start Card Who has ……

Creditors Days (Average period of credit received) Current Assets Current Liabilities

Dividend Yield Trade Creditors X 12 (or 365) Credit Purchases

Debt/Total Capital Percentage Dividend per Share Market Price per Share X 100

Gross Margin Debt Capital Total Capital X 100

DPS Dividend per share Gross Profit Sales X 100

Return on Shareholders Funds Total Ordinary Dividend Number of issued ordinary shares

Profit (after tax and preference divs) Ordinary Shares plus reserves Debt/Equity Ratio X 100

Price Dividend Ratio Debt Capital : Equity Capital

Net Margin Market Price per Share Dividend per Share

Acid Test Net Profit before interest and tax Sales X 100

P/E Ratio Current Assets – C. Stock Current Liabilities

Stock Turnover Market Price per Share EPS (Earnings per share)

Fixed Asset Turnover Cost of Sales Average Stock ( ) (OS + CS) 2

Dividend Cover Sales Fixed Assets

Return on Capital Employed (RoCE) Profit (after tax and preference dividends) Total Ordinary Dividend

Mark-Up Profit before interest and tax Shareholders Funds + LT Liabilities X 100

Debtors Days (Average period of credit Allowed) Gross Profit Cost of Sales X 100

Interest Cover Trade Debtors X 12 (or 365) Credit Sales

Earnings Per Share (EPS) Operating Profit Interest Charges

Profit (after tax and preference dividends) Number of Issued Ordinary Shares I Have …… End Card

Sequence 1. Current Ratio 2. Creditors Days 3. Dividend Yield 4. Debt/Total Capital % 5. Gross Margin 6. DPS 7. Return on Shareholder Funds 8. Debt/Equity Ratio 9. Price Dividend Ratio 10. Net Margin 11. Acid Test 12. P/E Ratio 13. Stock Turnover 14. Fixed Asset Turnover 15. Dividend Cover 16. Return on Capital Employed (RoCE) 17. Mark-Up 18. Debtors Days 19. Interest Cover 20. Earnings Per Share

Dominos ….

Bingo  Students - Draw 3x3 grid  Teacher – List 15 terms on board  Students - select 9 terms and create bingo card  Teacher – read out definition of terms  Students – cross out the appropriate terms when they match the definitions

Place Mat

Draw the rectangle and 4 lines as shown Each member of the group answers the question in their own section Permission to scout ‘No 1’ reads their list – others tick or add as appropriate Place Mat

Permission to scout Individually select the most important/relevant differences in your school No 2 writes no 1’s main difference into the centre box; No 3 writes no 2’s etc. or group arrives at consensus as to the most important points Place Mat

Agree on main points

© 2008 No Yes Perhaps