BUSS3 - INTERPRETING PUBLISHED ACCOUNTS

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Evaluating return on capital employed (ROCE):

ROCE (%) = Operating profit / Capital employed  x  100

  • Higher % is better
  • Look for a trend overtime
  • Low quality profits boosts ROCE
  • Leased equipment is not included in ROCE

Evaluating liquidity ratios:

Current Ratio

  • Interpreting results
    • A ratio of 1.5+ suggests efficient management of working capital
    • A low ratio of below 1 indicates cash problems
    • A high ratio means there is too much working capital
  • Look out for
    • Industry normalities (e.g. supermarkets work with low current ratios due to low debtors)
    • Trend in ratio (e.g. changes in ratio) are most important to look out for

Acid Test Ratio

  • Current adjusted for stocks
  • Considered a better way to measure liquidity, especially for business that carry a lot of stock
  • Focuses on the assets that a business can quickly turn into cash
  • Important to look out for changes like a significant fall in ratio, which indicates a serious problem

Profit Quality - whether the reported…

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