Chapter 4: Interpreting Published Accounts
Part 2 of Chapter 4
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- Interpreting Published Accounts
- Gearing (%)
- examines capital structure of a firm and its likely impact on firm's ability to stay solvent
- high gearing is greater than 50% and shows that the firm has borrowed a lot of money in relation to its total capital
- low gearing is below 25% and indicates that a firm has raised most of its capital from shareholders, in the form of share capital and retained profit
- non-current liabilities / total equity + non-current liabilities x 100
- Benefits of low gearing
- avoids pressure of repaying borrowing
- avoids having to pay high interest
- less risk of creditors forcing firm into liquidation
- Benefits of high gearing
- very cheap source of finance
- relatively few shareholders
- in times of high profit, interest rates will be lower than shareholder's dividends, so can keep more retained profit
- Financial Efficiency Ratios
- Debtors days
- shows number of days that it takes to convert receivables into cash
- firm will want to have as low a value as possible, meaning that recievables are being paid promplty
- receivables / revenue x 365
- Creditors days
- if business has high creditors figures because it has not paid a debt on time, this would be a bad sign
- firm will want to have as high a value as possible, meaning that payables are not being paid quickly
- firm will hope for creditors days that exceeds their debtors days figures, as this will help cash flow
- shows number of days that it takes to pay back any payables owed by a business
- payables / cost of sales x 365
- Stock turnover
- represents number of times per year that firm sells the value of its stock
- high figure means that stock is sold quickly
- Factors influencing stock turnover
- nature of the product
- length of product life cycle
- variety of products
- quality of management
- stock management systems
- importance of holding stock
- indicates how quickly stock is converted to sales
- cost of goods sold / average inventories held
- Asset turnover
- measures how well a company uses its assets in order to achieve sales revenue
- low figure shows that the business is not using its assets efficiently to achieve sales
- revenue (sales turnover) / net assets
- high figure shows that the business is using its assets efficiently to achieve sales
- Debtors days
- Shareholder's Ratios
- Dividend Yield (%)
- dividend per share / market price per share
- Dividend per share
- total dividends paid / number of ordinary shares issued
- measure the benefits of a company's activities to its shareholders, rather than other stakeholders
- Dividend Yield (%)
- Gearing (%)
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