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ƥ Income statement
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ƥ Balance sheet
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ƥ Net sales
ƥ Cost of goods sold

ƥ Gross profit

ƥ Operating expenses

ƥ Earnings before interest and taxes

ƥ Earnings before taxes

ƥ Net income (earnings after taxes)

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ƥ Evaluate the relationships between
financial statement variables
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ƥ Comparing ratios
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ƥ Limitations of ratio analysis
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r
 ‰ the ability of the firm to pay its way

 
  ‰ information to enable decisions
to be made on the extent of the risk and the earning potential
of a business investment
 
 ‰ information on the relationship between the
exposure of the business to loans as opposed to share capital
  ‰ how effective the firm is at generating profits
given sales and or its capital assets
 

 ‰ the rate at which the company sells its stock and
the efficiency with which it uses its assets

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ƥ Also referred to as the ƝQuick ratioƞ

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ƥ 1:1 seen as ideal
ƥ A ratio of 3:1 therefore would suggest
the firm has 3 times as much cash as it
owes ‰ very healthy!

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ƥ Looks at the ratio between Current Assets
and Current Liabilities
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ƥ Ideal level? ‰ : 1
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ƥ Too high ‰
ight suggest that too much of its
assets are tied up in unproductive activities ‰
too much stock, for example?
ƥ Too low - risk of not being able to pay your
way
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ƥ £

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number of shares
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  ‰ market price /
earnings per share ‰ the higher the
better generally. Comparison with other
firms helps to identify value placed on
the market of the business.
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dividend / market price x 100 ‰ higher
the better. Relates the return on the
investment to the share price.
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business is exposed to interest rate
fluctuations and to having to pay back
interest and loans before being able to
re-invest earnings

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ƥ Profitability measures look at how much profit
the firm generates from sales or from its
capital assets
ƥ Different measures of profit ‰ gross and net
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ƥ The higher the better
ƥ Enables the firm to assess the impact of its
sales and how much it cost to generate
(produce) those sales
ƥ A gross profit margin of 45% means that for
every 1 of sales, the firm makes 45p in gross
profit

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costs involved in production ‰ the
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ƥ The higher the better
ƥ Shows how effective the firm is in using
its capital to generate profit
ƥ A ROCE of 5% means that it uses every
1 of capital to generate 5p in profit
ƥ Partly a measure of efficiency in
organisation and use of capital

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ƥ The rate at which a companyƞs stock is

turned over

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ƥ Coverage ratios indicate the firmƞs ability
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ƥ Assets
ƥ Liabilities

ƥ Ownerƞs equity

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Assets = Liabilities ‰ Ownerƞs Equity

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ƥ Less time is preferred to more.
ƥ A high turnover is preferred to a low one.

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ƥ Indicates how fast firms sell merchandise.

ƥ Holding inventory is costly because the funds
invested in inventory could be used elsewhere.
ƥ A high turnover is preferred to a low one.

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ƥ
easures the relation between investment in long-

term or fixed assets (such as property, plant,
equipment) and sales.
ƥ Efficient use of fixed assets would be associated
with high sales.
ƥ A high turnover is preferred to a low one.

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ƥ Trends are predictable patterns that
have been observed in the past and are
expected to continue into the future.
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ƥ The amount of the change is simply the
current year minus the previous year.

ƥ The percentage change is computed as

follows:

  
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ƥ Changes in rupee amounts and
percentage terms help to expose
patterns.
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ƥ Analysts generally look at several yearsƞ worth
of financial information to discover trends.
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ƥ Common-size statements - financial
statements expressed in component
percentages
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ƥ For the income statement, sales is set at
100% and each other element is
expressed as a percentage of the sales
figure.

ƥ For the balance sheet, the total assets

amount is set at 100%, and each other
element is expressed as a percentage of
the total assets figure.

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