State the exam technique for analysing performance, Financial Management

Assignment Help:

Exam technique for analysing performance

The below steps must be adopted when answering a question on analysing performance:

Step 1   Review figures as they are and comment on them.

Step 2   Calculate relevant ratios according to performance, potential and position (if possible).

 

1  Performance (profitability) -how well has the business done

Return on capital employed (ROCE)

{Profit before interest & tax (PBIT)/Capital employed (CE)} X 100%

Operating profit margin

(PBIT/Turnover)X 100%

Asset turnover

Turnover/Total assets (number of times)

(Operating profit margin x asset turnover = ROCE)

Return on equity (ROE)

[Profit aftertax/ Shareholder funds (capital + reserves) ] x 100%

2  Position (liquidity)-short term standing of the business

Current ratio

Current assets/Current liabilities(number of times)

Quick ratio

Current assets -inventory/ Current liabilities (number of times)

Gearing -equity

Debt capital/ Equity (shareholders' funds)X 100%

Gearing -total

Debt  capital/ [Debt + equity (total capital] X  100%

Interest cover

Profit before interest & tax (PBIT) / Interest paid (Number of times)

Trade payable days

Trade payables/Cost of sales (or purchases)x 365 days

Inventory days

(Inventory/Cost of sales) x 365 days

Trade receivable days

(Trade receivable/ Sales) x 365 days

Working capital cycle

Trade receivable days + inventory days -trade payable (Days)

3  Potential (investor) -what investors are looking at

Earnings per share (EPS)

Profit after tax/Number of shares

P/E ratio

Share price/Earnings per share

Dividend yield

(Dividend per share/ Share price) X 100%

Dividend cover

(Earnings per share/ Dividend per share)

The above is not the complete list, but are the main ratios.

Step 3   Add value to the ratios by:

Interacting with other ratios and giving reasons

a) State the significant fact or change (i.e.decrease orincrease)
b) Explain the change or how it may have occurred by looking at business activities and other information.
c) Explain significance of the ratio in terms of implications for future and how it fits in with the user’s needs.
d) Limitations of ratio analysis. Look at the 2 figures used to compute ratio and criticise them. Also look at other factors that may distort the information (seasonal fluctuations, creative accounting etc.)

Another way of at discussing ratio's is to adopt 3W'sfor each ratio calculated:

WHAT

What has happened to the figures or ratios? Have theydecreased orincreased?

WHY

Explain why changes may have occurred by giving illustrations (think creatively!).

WOW

How do these changes affect the user of information -WOW that's great or not so great!


Related Discussions:- State the exam technique for analysing performance

Show factors influencing participation, Q. Show Factors influencing partici...

Q. Show Factors influencing participation? Factors influencing participation: several research studies have shown that the intensity of participation depends on four factors.

Arbitrage-free valuation approach, The main drawback of the tradition...

The main drawback of the tradition approach of valuation is that it discounts every cash flow using the same discount rate. For example, let us take 5-year (7.00 per ce

Sustainable growth rate, You are given the following information for Clapto...

You are given the following information for Clapton Guitars, Inc. Profit margin 6.3% Total Asset turnover 1.6 Total debt ratio 0.44 Payout ratio 35% Calculat

The safety margin, Norfolk Ltd is specialized in producing & selling air co...

Norfolk Ltd is specialized in producing & selling air conditions.  In 2010, the manufacturing cost per unit included:

Compare and contrast a forward contract and an option, QUESTION (a) Bri...

QUESTION (a) Briefly define foreign exchange rate risk and the three different types of exchange rate risks (b) Identify and outline the different methods of internal and ex

Valuing debt securities, Valuing Debt Securities Securities which promi...

Valuing Debt Securities Securities which promise to pay its investors a stated rate of interest and return principal amount at the maturity date are known as debt securities.

Opposite project - net present value, A company has the opportunity to sell...

A company has the opportunity to sell an old machine. The machine is fully depreciated to a zero book value but could be sold for $5,000. If the company did not sell the machine, i

Federal funds rate, Federal Funds Rate The interest rate that Amer...

Federal Funds Rate The interest rate that American banks that have funds in excess of the needs dictated by the Federal Reserve use to make overnight loans to banks whose

Market condition affecting cost of capital, Q. Market condition Affecting c...

Q. Market condition Affecting cost of capital? Market condition: if an investor is purchasing a security where the risk of the investment in significant the opportunity for add

Regulatory framework abroad, Regulatory Framework Abroad A regulatory m...

Regulatory Framework Abroad A regulatory mechanism, in terms of finance, is the mechanism to regulate the working of the financial system. Its function is to ensure the complia

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd