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You owe HWK. Textbook page 32 progress questionsDo Q 1, 7, 11, 12 (24 marks) . Interpreting Published Accounts. Ratios you MUST know. Profitability (ROCE). Gearing Liquidity (current and acid test ratios), Financial efficiency (asset turnover, stock turnover, creditor and debtor days), Shareholder ratios (dividend per share and dividend yield).

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    1. Resources for lesson This is a two lesson resource Students will need colour handout Calculators 2nd lesson students will need yellow ratio work-booklet

    2. You owe HWK Textbook page 32 progress questions Do Q 1, 7, 11, 12 (24 marks)

    4. Ratios you MUST know Profitability (ROCE). Gearing Liquidity (current and acid test ratios), Financial efficiency (asset turnover, stock turnover, creditor and debtor days), Shareholder ratios (dividend per share and dividend yield)

    5. Which is better?

    6. Which is better?

    7. Which is better? 100,000/200,000 x 100 = 50% where Co B has 1/10 x 100 = 10%100,000/200,000 x 100 = 50% where Co B has 1/10 x 100 = 10%

    8. Profitability ratios

    9. This is one type of ratio! Known as ROCE Return on Capital Employed

    10. Profitability Ratios The primary ratio. ROCE return on capital employed This tells us how efficient the company is by looking at their profits & comparing it to the funds invested in the business. ROCE = Operating profit x 100 Capital employed

    11. Examples of ROCE (2007)

    12. Examples of ROCE (2007)

    13. Examples of ROCE (2007)

    14. Examples of ROCE (2007)

    16. Other profitability ratios At AS you looked at Gross profit margin & Net profit margin, and in A2 you will be given credit for looking at this profitability ratio again!

    17. Gross Profit Margin

    18. Gross Profit Margin

    19. Net Profit Margin

    20. Comparing Gross to Net Profit Margins

    21. How to improve profits? Remember your hwk recently to read article on profitability? Improving Profits Business Review Nov 2008 What can you remember?

    22. Recap profitability ratios There are THREE profitability ratios..

    23. To help you learn all of this

    24. Gearing another ratio A Liquidity ratio

    25. Gearing This tells us how much of the companys finance is through debt! A highly geared business is funded heavily through long term debts A low geared business is funded mainly through its owners/shareholders.

    26. Gearing A company with 80% gearing. has 80% of funds through long term debts and 20% through owners/shareholders. A company with 35% gearing has 35% of funds through long term debts and 75% through owners/shareholders.

    27. Calculating Gearing Gearing = non current liabilities x 100 total equity & non current liabilities* Aka capital employed So if a company has 280 in non current liabilities and 1,000 in capital employed Gearing = 280 x 100 = 22% 1000+ 280

    29. Benefits of high gearing With low interest rates highly geared companies benefit from cheap finance. But when Interest rates go back up? Relatively few shareholders easier to keep control of the company. Fewer shareholders could mean that the business has less dividend pressure, and could retain profit for future investments.

    30. Benefits of low gearing Most of the capital is permanent and does not have to be repaid with interest! Less risky where creditors can not force the business into liquidation (think Woolies!) Easier to borrow more in the future if the company wants to expand.

    31. To help you learn all of this

    32. Liquidity ratios

    33. Liquidity ratios. What is liquidity? Liquidity is an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Money in the bank or cash on hand, is the most liquid asset.

    34. Liquidity Ratio These tell us how healthy the business is in the SHORT TERM It tells us whether the working capital is sufficient to cover the immediate debts! Current Ratio Acid Test Ratio

    35. Quick recap What is the money owed to a business from customers called on the balance sheet? Receivables (from debtors) What are the other current assets? Cash Inventories (stock)

    36. Current Ratio A liquidity ratio

    37. Current Ratio Current Ratio = current assets : current liabilities or Current Ratio = Current assets Current liabilities So what do you think a current ratio of 2:1 means? The company has 2 of assets for every 1 of debt

    38. Examples of Current ratios

    39. Examples of Current ratios

    40. What can they do to improve Current ratio? Sell under used non current assets but is this really wise?) BA is grounding 22 planes this winter! Raising more share capital (what the banks have done!) Increase long term borrowing! (OK when IRs are soo low!) Postpone planned investments eg Stelios disagreement over Easyjet!

    41. Good video link http://news.bbc.co.uk/1/hi/uk/8178474.stm About BA & how well its positioned to survive the current crisis looks at reducing CA, increasing N-CL & gearing all in one clip!

    42. Acid Test Ratio A liquidity ratio

    43. Acid Test Ratio This ratio looks at comparing assets with liabilities BUT with removing stock figures ACID TEST RATIO =(current assets inventories) : Current liabilities Or ACID TEST RATIO = Current assets inventories Current liabilities

    44. Why remove the inventories? Stock is THE MOST illiquid asset of the business It can take a long time to convert inventories (stock) into cash It can depreciate if sold as 2nd hand rather than produced into final product.

    45. Acid Test Ratio So another way of calculating the Acid Test Ratio = Cash & receivable (debtors) Current liabilities So what would an Acid Test Ratio of 1.5:1 mean? The company has 1.50 worth of liquid assets to every 1 of debt! The ideal situation is an Acid Test ratio of 1:1

    46. Quick Q If Tesco has a current ratio of 0.61:1, what do you think their Acid Test Ratio will be? Will it be higher or lower than this?

    49. Why is 1:1 ideal? Why is the acid test ideal 1:1? If a company has a ratio of 2:1 what does this mean? Why is that not the most efficient use of its liquidity? If a company has a ratio of 0.1 : 1 what does this mean? What does this suggest about the companys financial strength?

    50. So use your colour sheet

    51. Financial efficiency ratios

    52. Financial efficiency ratios

    53. Asset Turnover This tells us how well the company uses all its assets to generate its sales Asset turnover = Revenue (sales turnover) Net assets* * where net assets are Total Assets -Total liabilities * this is also the total equity figure at the bottom of the balance sheet.

    54. Examples of Asset turnover Its very difficult to compare different industries This is a ratio that definitely to be used benchmarking inter-firm comparison or over a period of time with the same firm. For example, Tesco will have a high asset turnover pile them high & sell them cheap. Meanwhile, Harrods would have a low asset turnover of lower quantity sales but with a high profit margin!

    55. Stock Turnover

    56. Stock Turnover This tells us the number of times a business will sell & replace its stock. A fishmonger should have a HIGH stock turnover of 365 times as it gets fresh fish delivered every day of the year! Where as a second hand car dealer may have a stock turnover of 12 times which is selling & replacing its cars on the forecourt once a month!

    57. Calculating Stock Turnover Stock Turnover = Cost of goods sold Average stock held List three business that would have a high stock turnover and three that would have a low figure for stock turnover. A bread shop has an opening stock of 5 000 at the start of the financial year and at the end of the year its stock is 6 000. The cost of sales for the shop is 55 000. Calculate its stock turnover.

    58. Factors that influence rate of stock turnover Nature of the product perishable, antiques Importance of holding stock in large or smaller quantities imagine going into M&S with empty shelves! High street stores need large quantities of stock. The length of the product life cycle Stock management systems Variety of products being held.

    59. Debtor & Creditor days

    60. Debtor Days Debtors are known as receivables Debtor days = receivables x 365 revenue This tells us how much credit the company gives to its customers. Sofa companies often give buy now pay later options whereas at the local petrol station I have to pay immediately!

    61. Creditor Days Creditors are known as payables Creditor days = payables x 365 revenue This tells us how long the company takes to pay back the money it owes to its suppliers. Delaying payment for as long as possible can help the business! BUT can cause problems with suppliers in future! BUT can incur interest charges (Late Payment Act 1998!)

    62. So use your colour sheet

    63. Shareholder ratios Dividend per share Dividend yield

    64. Dividend per share DPS = Total dividends Number of shares issued Answer is expressed as number of pence per share In 2008 M&S anounced dividends of 343.6m for 1,586.48m shares 21.65p per share. Obviously the higher the dividend the better for shareholders! The lower the dividend per share might mean that the company is retaining profit for investments!

    65. Dividend Yield Dividend Yield = Dividend per share x 100 Market price of share So using the M&S calculation previously, if the share price was 220p on one day the Dividend yield would be 21.65/220 x 100 = 9.48% You would need to compare this figure with past figures & can vary greatly with fluctuations in the stock market!

    66. So use your colour sheet

    67. What do these ratios mean? NPM of 24% ROCE of 15% Debtor days of 20 and Creditor days of 10. Stock turnover of 12 times? Dividend per share 80p Dividend yield 5% Acid test ratio of 1.8 : 1 ? Acid test ratio of 0.78 : 1 ? Gearing of 12% or Gearing of 66% - which is better for the business? Why is it a bad situation for a company to have a gearing of 90%?

    68. Interpreting Ratios Textbook p169 B1 .. Do Q3 Which business would you buy based on the quantitative factors?

    69. Your set of calulations You will need your ratio colour sheet & a calulator

    70. Your go Calculate ratios ROCE Gearing Current Ratio Acid Test Ratio

    71. Answers

    72. Profitability ratio

    73. Gearing ratio

    74. Liquidity ratios

    75. Financial Efficiency ratio

    76. Financial Efficiency ratio

    77. Financial Efficiency ratio

    78. Interpreting Ratios Dodgy scanning ? Marcouse p73 (different marks awarded)Marcouse p73 (different marks awarded)

    79. Interpreting Ratios

    80. HOMEWORK 2 Yellow Work booklet 5 pages Complete the tasks

    81. Homework 1 Read textbook chapter on Ratios well be continuing with these next lesson

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