21642 Chapter Notes - Chapter 8: Trend Analysis, Cl Financial, Market Price
Analysis and Interpretation of Financial Statements
Objective of ratio analysis - to reveal the results of operations and finical conditions of a business.
Financial Ratios:
•Profitability - degree of financial success based on revenues and expenses
•Efficiency - how efficiently resources are being utilised
•Liquidity - how easily resources may be converted into cash
•Gearing - relationship between equity contributed by owners and by others
•Investment - assess the returns and performances of shares
Comparisons:
-Past periods
-Similar businesses
-Planned performance
Internal benchmarks:
-Budgets
-Previous results
-Other business units within the same firm
-Trends
External benchmarks:
-Competitors
-Industry averages
Key steps in financial ratio analysis:
1. Identify users and their information needs
2. Calculate appropriate ratios
3. Interpret and evaluate results
Average = Amount at start + End of year / 2
Profitability Ratios
Return on Equity (ROE) =
•Return on Shareholder’s Funds (ROSF) = Net profit after tax / Average shareholder’s equity x
100
•Return on Capital Employed (ROCE) = Earnings before interest and tax / Average shareholder’s
equity + Average long term equities x 100
•Earnings Before Interest and Tax (EBIT) Margin = EBIT / Sales x 100
EBIT = Operating Profit
•Gross Profit Margin = Gross profit / Sales x 100
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