In large organizations, employees are likely to be particularly interested in one part of the entity's business. Financial analysis requires an understanding of a company's products, services, and operating characteristics. This shows the company's overall performance expressed as a percentage of return on total investment.
The company's liquidity is measured by examining the relationship between current assets and current liabilities.
Analysis of capital structure
Measuring the performance effects of capital structures
Although inventory spends an average of five additional days on the property, receivables collection has improved in 20X2 and X needs an average of three additional days to meet its debts. It is very difficult to judge this length of the working capital cycle in absolute terms. If we had access to some industry averages for the working capital cycle, we could respond with more confidence.
Measuring statement of financial position gearing
Valuation ratios and analysis for the investor
Price/earnings ratio
This ratio shows how many times the profits will cover the interest costs; the higher the ratio, the better. W has much higher earnings per share than V, but the price of one share in W is lower than one share in V, resulting in two very different P/E ratios. The rational expectations of buyers and sellers in the stock market are usually incorporated into the stock price.
The P/E ratios of these entities tend to suggest that the market considers investment in W to be riskier than investment in V. The numerator of the fraction is valid (an updated market price can easily be obtained during the market's open ). hour), but the EPS figure is the latest available which, for a listed entity in many markets, can be up to 6 months old. W may have issued a profit warning, or may have suffered adverse events, such as the loss of a major contract or the resignation of a key director.
A better picture of V and W could be obtained if, for example, stock price charts from the past year were available, so that the analyst could see whether the stock prices mentioned above are near the average or not.
Dividend-related ratios
Statement of financial position ratios
Note that in this case the opening inventory figure is not available and therefore we cannot calculate an average, so the closing inventory is used.). Capital employed is calculated as deferred tax provisions from issued capital accumulated by interest-bearing borrowings, that is, total assets minus current liabilities. Note that these ratios are usually expressed as shown above, that is, as a number compared to 1.
Note that, due to limited information, closing debtors and creditors were used instead of average figures.
Analysing the cash flow statement
It is also clear that the company has invested heavily in tangible fixed assets, although it has not obtained long-term financing for this. A current tax provision could also be included but is not identified in the information provided. For many external users, cash is a more important indicator than profit, so this ratio should be calculated where the information is available.
This gives an indication of how many years it would take to pay off long-term borrowings if all cash generated from operations were used for this purpose. We cannot calculate these ratios for BC because the business has no long-term loans. This gives an idea of the extent to which the business can finance its capital expenditure from cash flows from operating activities.
If the country cannot meet its capital expenditure from this source, some form of longer-term financing will likely be required. In the case of BC, the current level of capital expenditure may not be typical. The company appears to be growing rapidly (judging by the sharp increase in working capital investments), and operating profits and cash flow may not yet have caught up with investments.
Using ratios in the exam
Some key figures may be of limited use, or may even be misleading in relation to service companies. For example, caution should be exercised with regard to rates of return on capital in companies with a low level of conventional fixed assets but a high level of unrecognized intellectual capital assets. It is usually appropriate to round to no more than one or two decimal places.
The analysis learning outcomes for F2 are similar to those of its predecessor, P8, and therefore many of the comments regarding the analysis and interpretation of the financial statement are valid. Although the general level of analysis and interpretation has tended to improve since the first sitting of Paper 8, many candidates provide very poor answers. One of the markers commented: 'Some candidates showed an inability to calculate basic ratios.
They don't seem to understand what they are trying to do and seem to calculate and interpret based on a formulaic approach rather than demonstrating that they can use ratio analysis as a useful tool. They don't really seem to understand what relationships can and can't tell them. There seems to be a rote learning approach as opposed to fully understanding the uses and limitations of ratio analysis.
Summary
Cash and cash equivalents at the beginning of the period. 158) Cash and cash equivalents at the end. The BSP's cash resources were at a low level at the beginning of 20X6, so the BSP issued a new share issue to finance the cost of the new operation and the necessary increase in working capital to finance the new activities. As Assistant CFO, you were responsible for preparing the draft financial statements that were circulated to the directors ahead of the board meeting later this week.
The income statement shows a deficit, which is obviously bad news, especially since the budget showed a surplus for the year. However, the business's liquidity has actually increased by quite a lot between March 20X6 and March 20X7. They say "cash is king" so I assume the poor profitability is a short-term problem while the new operation settles down.
As you know, we almost managed to hit our sales targets in both the fire alarm and burglar alarm sectors for the year, (although of course we had to offer some customers special discounts and extended credit as an incentive). It would be really helpful if you could give me a brief report, before this week's meeting, that tells me what this statement of cash flows means. The consolidated statement of cash flows for the year ended 31 March 20X7 (with comparative figures for 20X6) is as follows:
There was no increase in long-term borrowings throughout the two-year period covered by the cash flow statement above. Note that in this case it is possible to derive the opening balance by using information in the cash flow statement.
Report on draft statement of cash flows for the financial year ended 31 March 20X7
- The difference between cash and profit
- Profit and loss
- Working capital
- Prospects for the future
- Conclusion
In the case of the BSP's statement of cash flows, there is indeed a significant amount of cash at 31 March 20X7. While some of this (approximately one third) remained in the statement of financial position at 31 March 20X7, most of it was absorbed by major cash outflows from operations and the purchase of property, plant and equipment. The loss before tax in the year ended 31 March 20X7 was significantly mitigated by the gain on disposal of foreign subsidiaries.
Using these adjusted figures, net profitability (measured on a pre-tax basis) was 6.2% in the 20X6 financial year, while the loss in 20X7 represented 9.1% of revenue. The operating section of the statement of cash flows includes adjustments for increases and decreases in working capital. Compared to inventory and debtors, the movements in the 2 years in creditors are relatively minor.
Therefore, unless there is an improvement in sales and profitability in the remaining group businesses, the 20X8 performance is likely to be even worse than in 20X7. The breakdown of the income figure shows that there was a sharp decrease in the sales related to anti-theft; sales in 20X7 were only 90.3% of sales in 20X6. Finally, the statement of cash flow serves to highlight some worrying trends in the business.
APPENDIX: Calculations
INTERPRETATION OF ACCOUNTING RATIOS it cannot necessarily be assumed that this is a short-term problem while the new operation settles down; careful cost control will be required if the company is to return to profitability overall. Offering discounts to attract new business can be effective in increasing revenue, but this practice tends to reduce profitability. As the sale of the subsidiaries took place so recently, the turnover figures for 20X7 are not affected.
However, these two subsidiaries accounted for about 10% of sales and were consistently profitable. These increased significantly in 20X7 compared to 20X6, but the large cash surplus at the start of the new financial year should ensure that, at least for a few months, there are no short-term borrowings and therefore no payments. interest. . The shortfall has been offset by sales of fire alarm systems, which tend to justify the change in business strategy.
However, if the difficult situation in the burglar alarm market continues, revenues from this source may fall further. Shareholders made a significant contribution in the form of new capital in 20X7; while they may be content to wait for a return while the new line of business is established, they may become impatient if there is no dividend in 20X8. This statement of cash flows shows the more positive side of the divestment of two profitable subsidiaries; negative aspects are likely to affect the 20X8 and subsequent statement of cash flows.
1. (Loss)/profit before tax as a percentage of revenue
Inventory movement
Receivables movement
