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
    • 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

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