ICR lecture 17

• non-financial information

  • highlights
  • company information
  • brands/ business model
  • board of directors
  • Corporate governance report
  • CSR report
  • strategic report
  • directors report
  • Statement of directors responsibilities
  • independent auditors report
• things that are not often included in the financial statements


  assets without a specific and measurable historic costs are not recognised in the SOFP

  • internally developed goodwill; brand names; technological know how; staff experience
• what is vertical analysis


  highlight the structure of financial statements - understanding financing or cost structure
• what is horizontal analysis 


  highlight percentage change in items between periods - more year's information can help identify trends
• what is ratio analysis


  compares values, says how much of one thing there is compared to another thing
• typical classification of financial ratios

  • profitability
  • efficiency
  • liquidity
  • gearing/ leverage
  • investor ratios
• profitability ratios


  gross profit margin

  operating profit margin

  ROCE (return on capital employed)

  ROSF (ROE) - return on shareholder's funds
• Gross profit margin


  Gross profit/ sales x 100
• Operating profit margin


  PBIT/ sales x100
• ROCE


  PBIT/ equity and debt
• ROSF (ROE)


  profit after distribution (after interest and taxation)/ equity

  --> the higher the better
• Efficiency ratios 


  Asset turnover

  Non-current asset usage

  Inventory holding period

  Trade receivables collection period/ debtor turnover

  Trade payables payment period/ payables turnover
• Assets turnover


  total sales revenue/ net assets
• Non-current asset usage


  Total sales revenue/ non-current assets at NBV
• Inventory holding period 


  average inventory/ costs of goods sold x 365

  • the lower the better
• Trade receivables collection period


  average trade receivables/ total credit sales x 365

  • the lower the better
• trade payables payment period


  average trade payables/ total credit sales x 365

  • the higher the better
• the working capital cycle 


  inventory days + receivables - payables

  • the lower the better
• liquidity ratios 


  current ratio

  acid test ratio
• current ratio


  current assets/ current liabilities
• acide test ratio


  current assets less inventory/ current liabilities
• Gearing/ leverage ratios


  gearing ratio

  interest cover
• Gearing ratio


  debt/ debt + equity x 100

  • if 'too high' a danger of over-commitment to pay interest
• interest cover 


  profit before interest and taxes/ interest expense

  • the higher it is the easier it is for the business to cover borrowing cost
• Investor ratios


  dividend cover

  dividend yield

  earning per share

  price earning ratio
• dividend cover


  profit after tax due to ordinary shareholders/ amount of ordinary dividend
• dividend yield


  dividend per ordinary share/ market price per ordinary share (from stock exchange)

  • the higher the better
• Earnings per share 


  profit after tax due to ordinary shareholders/ number of ordinary shares

  • the higher the better
• price earning ratio


  share price (from stock exchange)/ earning per share (as above)

  • a high P/E ratio can mean that a stocks price is high relative to earnings and possibly over valued
  • a low P/E ratio might indicate that the current stock price is low relative to earnings