Analysis and evaluation of financial information flashcards

Topic 8: Analysis and evaluation of financial information

ROCE for a sole trader and for a limited company

Sole trader: profit before interest ÷ (capital + non-current liabilities) × 100. Company: profit from operations ÷ (equity + non-current liabilities) × 100.

Profit £27,000 after loan interest £3,000; capital £120,000; loan £30,000. Sole trader ROCE?

(27,000 + 3,000) ÷ 150,000 × 100 = 20.00%.

Capital gearing: formula, and the figure for share capital £150,000, reserves £60,000, NCL £90,000

NCL ÷ (issued share capital + reserves + NCL) × 100. 90,000 ÷ 300,000 × 100 = 30.00%.

Cost of sales £96,000; average inventory £12,000. Rate of inventory turnover and inventory days?

96,000 ÷ 12,000 = 8 times. 12,000 ÷ 96,000 × 365 = 45.6 days.

Convert a 50% markup to a margin, and a 40% margin to a markup

Margin = 50 ÷ 150 × 100 = 33.33%. Markup = 40 ÷ 60 × 100 = 66.67%.

Current assets £30,000 (inventory £12,000), current liabilities £20,000. £4,000 of inventory is bought for cash. Effect on the ratios?

Current ratio stays 1.50 : 1. Liquid ratio falls from 18,000 ÷ 20,000 = 0.90 : 1 to 14,000 ÷ 20,000 = 0.70 : 1. Profit is unchanged.

Effect on profit and cash: depreciation; a loan received; drawings

Depreciation: profit down, no cash effect. Loan received: no profit effect, cash up. Drawings: no profit effect, cash down.

Trade receivables £18,000; credit sales £146,000. Receivable days?

18,000 ÷ 146,000 × 365 = 45.0 days.

What might a current ratio well above 2 : 1 indicate?

Surplus inventory, slow-paying receivables or idle cash: resources not working.

Financial and non-financial limitations of ratio analysis

Financial: historic data; historic cost ignores inflation; different policies; estimates; an untypical or window-dressed year end. Non-financial: staff morale, customer satisfaction, reputation, market conditions, quality, environmental impact.