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

Option-adjusted spread, The Option-Adjusted Spread (OAS) is a measu...

The Option-Adjusted Spread (OAS) is a measure of the yield spread (expressed in basis points) which can be used to convert differences between the values an

Bond's capital gain yield, A 10-year, 12% semi-yearly coupon bond with a pa...

A 10-year, 12% semi-yearly coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,050. The bond sells for $1,050. (Suppose that the bond has just bee

Question, You deposit $500 today in a savings account that pays 3.5% intere...

You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

What are the internal audits, What are the Internal audits Internal au...

What are the Internal audits Internal audit is seen as independent from management who are devising and implementing internal controls and must be able to provide advice on in

Explain discounted cash flow analysis, Discounted cash flow analysis is th...

Discounted cash flow analysis is the term employ to describe the technique whereby the value of future cash flows is discounted back to a present value so that the monetary values

Factors considered in assigning a credit rating, Credit rating agenci...

Credit rating agencies carry out credit rating. Companies appoint these agencies to assign credit rating for their corporate issues. The rating agencies may condu

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

Define the primary reasons that companies hold cash, What are the primary r...

What are the primary reasons that companies hold cash? Companies hold cash to make essential payments, to take benefit of opportunities as they arise, and to cover unforeseen eme

Long currency straddle, If the future spot rate of euro at option expiratio...

If the future spot rate of euro at option expiration is uncertain and takes a value within a range of $0.95 to $1.10, construct a contingency graph for a long currency straddle and

Downgrade risk, Market participants' measure the default risk of an i...

Market participants' measure the default risk of an issue on the basis of the credit ratings that the credit rating agencies assign to the issues. Once rating is

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