Interpretation of Accounts

Hardy December 2010

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

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

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%

Liquidity

Current ratio Current assets/current liabilities Acid ration (Current ratios-inventory)/current liabilities

Liquidity

2009 2010

Current ratio 4800/4600= 104% 6200/3400= 182%

Acid Ratio 2900/4600=63% 4000/3400=118%

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

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

Return on Capital

Return on capital employedGross profit/capitalNet profit/capital

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%

Banking Ratios

Interest Cover Profit before interest/Interest Gearing Debt/Equity or Debt/(Debt+Equity)

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%