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Title: Finance ratio deep analysis
Description: This helps to Finance ratio deep analysis
Description: This helps to Finance ratio deep analysis
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Finance ratios deep analysis
Categorisation of ratios
You might recall that ratios can be classified into the subsequent four categories:
Profitability and return
Debt and gearing
Liquidity: control of cash and other working capital items
Shareholders' investment ratios (or 'stock market ratios')
Profitability and return
Return on capital employed (ROCE)
ROCE =
Profit before interest & tax (PBIT)
%
Profit from operations
=
Capital employed
Total assets less current liabilities
Where capital employed = shareholders' funds + long-term debt finance
When analyzing ROCE, it is important to consider the following factors:
The level of risk associated with the business
...
The ROCE of similar businesses in the industry
...
There are potential challenges in achieving comparability when interpreting
ROCE, which include:
Differences in the policy regarding the revaluation of assets
...
The classification of a bank overdraft as either a short-term or long-term
liability
...
ROCE = Asset turnover × Profit margin
...
However, it is
specifically applicable to capital-intensive businesses and focuses solely on
non-current assets
Profit margin
Profit margin =
PBIT
%
Gross profit margin =
Gross profit
Sales
%
Sales
Debt and gearing
Debt ratio
Current and non-current liabilities % (>50% = high)
Debt ratio =
Current and non-current assets
Debt:equity
Debt:equity ratio =
Or simply
Interest bearing net debts
Shareholders' funds
% (>100% = high)
Value of debt
Value of equity
Operating gearing (leverage)
Gearing =
Contribution (sales minus variable cost of sales)
PBIT
The correlation between the cost operating structure and profitability is
exemplified in this text
...
Undoubtedly, this holds immense importance for bankers and lenders
...
5:1 ratio varies depending on the industry
...
Quick ratio
Quick ratio (acid test) =
Current assets - inventory
Current liabilities
Illiquid and subjectively valued inventory is effectively removed
...
Is a 1:1 ratio considered acceptable? Numerous supermarkets function
with a ratio of 0
...
Receivables collection period (receivables days)
Average collection period =
Trade receivables
X 365
Credit sales
Inventory days
Inventory
Inventory days =
Cost of sales
X 365
Please be aware that the cost of sales does not include the depreciation of
any production equipment
...
Payables payment period (payables days)
Payables payment period =
Trade payables
Purchases
X 365
Use cost of sales (excluding depreciation) if purchases are not disclosed
...
The organization preserves a significant portion of its earnings
for reinvestment
...
This company poses a certain level of risk or exhibits a slow
growth rate
...
Shareholders
anticipate an increase in stock prices and desire a return (dividends + capital
gains) that surpasses the return obtained from fixed interest securities
...
To
ensure accurate comparisons over time, a consistent basis of calculation must
be established
...
Additionally, one must take into account the possibility of dilution through
the exercise of warrants or options, as well as the conversion of bonds
...
Variations occur when the dividend is maintained despite declining profits
...
Dividend payout ratio =
Dividend per share
EPS
P/E ratio
P/E ratio =
Market price per share
EPS
The greater the value, the more favorable it is in this context: it signifies the
market's trust in substantial earnings growth and/or minimal risk
...
Interest rate fluctuations will impact the P/E ratio; an increase in rates will
result in a decrease in the P/E ratio as stocks become less appealing
...
Earnings yield
Earnings yield =
EPS
Market price per share
%
This demonstrates the dividend yield in the absence of profit retention
...
Net assets per share
Net assets per share =
Net assets
No of shares
This is an imprecise gauge of a company's worth, susceptible to distortion
...
A substantial return on shareholders' funds
indicates that the company is generating profits and has a greater amount of
funds accessible for equity shareholders
...
Other factors
Investors also express their interest in the prevailing market price, historical
and prospective returns, as well as the level of investment security
Title: Finance ratio deep analysis
Description: This helps to Finance ratio deep analysis
Description: This helps to Finance ratio deep analysis