F108MAN PART B
- Created by: John Beare
- Created on: 12-09-12 18:20
Ratio Analysis Liquidity (current asset and Acid t
Liquidity Ratio the ability to turn stocks into cash quickly (at their true value)
Current Asset = current asset/current liabilities
Acid test = current asset/current liability - stock
normal ratio is 2:1 results may be misleading especially where a creditor payment is due or in some industries it is not uncommon for the ratio to be less. it may signify serious financial position especially if there is a high degree of stocks
hence Acid test
better measure of firms immediate liquidity position due to the fact that it may be impossible to turn stocks into cash.
conversly if there is a high ratio it may indicate that too much capital is tied up in stock
norm is suggested as 1:1 and the same contridictions apply as above
Ratio Analysis Profitability ROCE Gross/Net Profit
How much profit the firm has made in relation to size/ how much capital is invested
To establish Capital Employed Total assests/current liabilities
ROCE = Profit before interest and taxation/Capital Employed x 100
How profitable the company has been in relation to what is used to finance it
Gross Profit = Gross profit/Sales x100
Trading success
Mark up = Grossprofit/cost of goods sold x 100 complements
reduced to stimulate activity which may increase volume of sale
Net Profit not an effective way of comparing firms as varying finacial arrangements
who uses the information: Profitability Ratio Anal
The results are industry specific; establish industry norms prior to comparisons
ROCE,(if steady growth is shown) , mark up, GP/NP and asset turnover useful for investors
State of economy when assessing poor performance GP performance, likely to expect a cut in administrative expenses and reduced mark up ratio if recession
increased profits will show an improving market increase in efficiency
Efficiency Stock turnover fixed asset turnover Tra
Working capital efficiency
creditor and debtors time to pay correlation to liquidity creditors time to pay is high and increaing it may have an adverse affect on the firms ability to pay
poor liquidity may impact the firms ability to pay its creditors which may be indicated by increase in days taken to pay.
if the creditors are allowed more time it indicates a inefficiency in credit control procedures: without careful control can lead to cash flow problems
Stock turnover: increase in stock holding may indicate falling sales
Fixed asset turnover accounting policy investment in fixed assets is paying off. however it is a net book value, falling sales can be offset by depreciation of fixed assets
Gearing Ratio
Debt:equity Ratio
High debt to equity ratio gives the impression of a risky entity, however this is not uncommon in the construction industry.
high debt levels indicate it is funded by long term loans which is riskier
reduces the ability to secure future loans (if required in the future)
Interest cover
area of strength if profits sufficiently cover interest payments
Balance Sheet and Profit & Loss
P&L indicates income v. expeniture over the year
Balance sheet tells the reader where the money has gone
Ratio analysis considerations
consider year on year inflation
Accounting policy can have considerable effect
Age of assets can influence results regarding book value of assets
asset turnover will indicate if too much capital is held in stock, which could be earning money for the organisation
any large holdings of cash may be used to make payments due
Investment ratios
Dividend yield the percentage return on his investment, dividend of the share/market price
Earnings per share (EPS) between one years earnings and another relating to something tangiable ie shares in issue
Price to earnings (P/E)ratio multiple of earnings how long it would take to pay back market value (same sector analysis only)
High ratio is good, shares are in demand so price will be high
Risk
Business Risk will affect companies shares
Unsystematic risk (specific) to the industry
Systematic Risk faced by all companies War, recession, interest rates
an investor with a highly diversified portfolio will be able to ignore unsytematic risk
Companies with high financial gearing are (high debt levels) riskier, an increase in equity will reduce that risk
A company with fixed costs are high risk as those costs are always payable
foreign ventures are riskier, transaction and political
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