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Interpretation of Accounts
Hardy December 2010
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Key Areas for Analysis- Overview
From question, 5 ratios!! Profitability Liquidity Management Return on Capital For exam critical, you must explain- draw from the
question
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Look at the question
Manufacturing company Falls in share price, property values Impairment losses $6m, charge to CofS $1.5m Investment losses $1.6m Redundancy $1.3m Increase in bank rate
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Profitability Gross profit Gross profit/sales
2009 2010
Gross Profit 10000/36000=27.8% 4000/29500=13.6%
Gross profit (Severance & impairment)
10000/36000=27.8% 4000/(29500- 1500-1300)=15%
Net profit 3500/36000=9.7% (2100)/36000
Net profit (Severance & impairment)
3500/36000=9.7% [(2100)+1500+1600+1300]/36000=6.4%
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Liquidity
Current ratio Current assets/current liabilities Acid ration (Current ratios-inventory)/current liabilities
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Liquidity
2009 2010
Current ratio 4800/4600= 104% 6200/3400= 182%
Acid Ratio 2900/4600=63% 4000/3400=118%
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Management Ratios
Receivables days (Receivables/sales)*365 Inventory days (Inventory/ Cost of sales)*365 Payables days (Payables/cost of sales)*365 Working capital cycle Receivable days + inventory days – payables days
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Management Ratios
2009 2010
Receivables days
(2800/36000)365=28
(2200/29500)365= 27
Inventory days (1900/26000)365= 27
(2200/25500)365=32
Payables days (2800/26000)365=39
(3400/25500)365=49
WC Cycle 28+27-39= 16 27+32-49=10
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Return on Capital
Return on capital employedGross profit/capitalNet profit/capital
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Return on capital employed
2009 2010Gross return on capital employed
10000/(23000+5000)=35.7%
4000/21600=18.5%
Net return on capital employed
3500/28000= 12.5%
Net return on capital employed
3500/28000= 12.5%
[(2100)+1500+1600+1300]/28000= 8.2%
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Banking Ratios
Interest Cover Profit before interest/Interest Gearing Debt/Equity or Debt/(Debt+Equity)
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Banking Ratios
2009 2010
Interest Cover 5500/500= 11 (1900)/600=
Interest Cover 5500/500= 11 [(1900)+1500+1600+1300]/600=4
Gearing (Debt/equity)
5000/23000= 21.7%
4000/17600= 22.7%
Gearing (Debt/debt+equity)
5000/28000= 17.9%
4000/21600= 18.5%