1. Part 7: Chapter 47 An introduction to the analysis and interpretation of accounting statement
By: Nenae 11gs

2. What are ratios use for?
To compare business whether which are getting more profit

3. Who are interest in these ratio?
Shareholders
Lenders
Customers
Suppliers
Employees
Government
Competitors

4. Categories of ratio Profitability ratios Liquidity ratios
Efficiency ratios
Shareholder ratios
Capital structure ratios
Other ratios

5. Profitability ratios (as percentage)
1. Return on capital employed (ROCE) = net profit x 100 capital employed This show how successful managers are at earning a profit from capital used in the business. For every $ invested, the business make …% extra. 2. Gross profit margin = gross profit x 100 sales This show how much gross profit is made for every $ earned. For every $ make from sales, …% kept as gross profit margin. 3. Net profit margin = net profit x 100 This show how much net profit is made for every $ earned. For every $ make from sales, …% is kept as net profit margin.

6. Liquidity ratios
1. Current ratio = current assets current liabilities This show how many times a business can pay its short term debts. 2. Acid ratio test = current assets – stock Similar to current ratio, however without stock because some business may find it difficult to sell stock quickly.

7. Efficiency ratios
1. Inventory turnover (times) = cost of sales average inventory This measure how efficient a business is at maintaining an appropriate level of inventory. 2. Accounts receivable/ sales ratio = 1: … then translate into length of time a debtor takes to pay: 365 x 1 = …days … 3. Accounts payable/purchases ratio = 1: … then translate into length of time we take to pay out creditors: 365 x 1 = …days

8. Shareholder ratios
1. Earnings per share (EPS) = net profit after interest and tax and preference dividends
number of ordinary shares issued
This gives the shareholder a chance to compare one year’s earnings with another in terms easily understood.
2. Price/earnings ratio (P/E) = Marketing price per share
earnings per share
The greater the P/E ratio, the greater demand for the shared.
3. Dividend yield = Gross dividend per share
market price per share
This measure the real rate of return by comparing the dividend paid to the market price of a share.
4. Dividend cover = net after tax and preference dividends
ordinary dividends paid and proposed
This gives the shareholder some idea as to the proportional that the ordinary dividends bear to the amount available for distribution to ordinary shareholders. If the dividend is to be 3 times covered, this means that one-third of the available profits is being distributed as dividends

9. Capital structure ratios
-Gearing = long term loans + preference shares x 100
ordinary share capital + reserves + preference shares + long term liabilities
Or in shorter formula Prior charge capital x 100
total capital

10. Other ratios
1. Operating profit/loan interest 2. Total external liabilities/shareholders’ funds 3. Shareholders’ funds/total assets

11. Fixed and variable costs
Fixed costs are the cost which remain constant. This do not matter whether the activity increase or decrease. Variable costs are the cost that change due to the increase or decrease of the activity

12. Questions…. ?

13. 1g). a/c receivable/sales ratio 1h). a/c payable/purchases ratio
Income Statement $
Sales
555,000
Less: COGS
100,000
opening inventory
200,000
add: purchases
300,000
(60,000)
less: closing inventory
(240,000)
gross profit
315,000
Less: depreciation
5,000
wages, salaries, commission
165,000
other expenses
45,000
(215,000)
Net profit
Statement of financial position
non-current asset
equipment at cost
50,000
less: depreciation to date
(40,000)
10,000
current asset
inventory
60,000
a/c receivable
125,000
bank
25,000
210,000
total assets
220,000
current liabilities
a/c payable
(104,000)
net assets
116,000
financed by:-
capital
balance at start of year
76,000
add: net profit
176,000
less: drawing
total capital
Calculate:
1a). ROCE
1b). Gross profit margin
1c). Net profit margin
1d). Inventory turnover
1e). Current ratio
1f). Acid test ratio
1g). a/c receivable/sales ratio
1h). a/c payable/purchases ratio
1a). 100,000/(76, ,000/2) = 104.2%
1b). 315,000/555,000x100 = 56.8%
1c). 100,000/555,000x100 = 18%
1d). 240,000/(100,000=60,000/2) = 3 times
1e). 210,000/104,000 = 2.02
1f). 145,000/104,000 = 1.39
1g). 125,000/555,000x12 = 2.1 months
1h). 104,000/200,000x12 = 6.24 months

14. Net profit after interest and tax and preference dividends = $300,000
Number of ordinary share issued = $500,000
Market price per share = $4.20
Gross divided per share = $20
Interest = $10,000
Ordinary dividends paid and proposed = $120,000
2a). 300,000/50,000 = 60
2b). 4.20/0.6 = 7
2c). 0.20/4.20 = 4.76%
2d). 300, ,000/120,000 = 2.58 times
3).30,000/210,000 = 14.3%
Calculate: 2a). Earnings per share 2b). Price/earnings ratio 2c). Dividend yield 2d). Dividend cover 3). If prior charge capital = 30,000 and total capital = 210,000, what is the gearing?