BUSS1030 Lecture Notes - Lecture 9: Gross Margin, Financial Ratio, Financial Statement
17 May 2018
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Lecture 10: Analysis and interpretation of financial statements
Financial ratio classification
• Profitability : Measure of success in wealth creation
• Efficiency: Effectiveness of utilisation of resources
• Liquidity: The ability to meet short-term obligations
• Financial gearing: Measure of degree of risk to do with the amount of leverage used to
finance the business
• Investment: Measure of the returns and performance of shares held by a business
The need for comparison
Ratios need to be compared with some form of bench mark for the information to be
evaluated
e.g. past periods; similar business; planned performance
Financial ratios
When a ratio involves a comparison between two statements of financial position, we
use year-end figures
• If the ratio involves both the statement of financial position and the statement of
financial performance, we would use the average of the 2 figures from the statement
of financial position rather than the year-end figure
Profitability ratios
• Return on ordinary shareholders’ funds/return on equity (ROSF)
• Compares the amount of profit for the period available to the ordinary
shareholders with the ordinary shareholders’ average stake in the business
during that same period
•
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• Return on capital employed (ROCE)
• Relationship between the operating profit generated during a period and the
average long-term capital invested in the business during that period
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• Operating profit margin
• Operating profit for the period to the sales during that period
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• Gross profit margin
• Relates the gross profit of the business to the sales revenue generated during the
same period
• Gross profit is the difference between sales and cost of sales
•
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Efficiency ratios
• Average inventories turnover period
• Measures the average period for which inventory is being held
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• Average settlement period for accounts receivable
Document Summary
Lecture 10: analysis and interpretation of financial statements. Financial ratio classification: profitability : measure of success in wealth creation, efficiency: effectiveness of utilisation of resources. Liquidity: the ability to meet short-term obligations: financial gearing: measure of degree of risk to do with the amount of leverage used to finance the business. Investment: measure of the returns and performance of shares held by a business. Ratios need to be compared with some form of bench mark for the information to be evaluated e. g. past periods; similar business; planned performance. When a ratio involves a comparison between two statements of financial position, we use year-end figures. If the ratio involves both the statement of financial position and the statement of financial performance, we would use the average of the 2 figures from the statement of financial position rather than the year-end figure.
