Topic 4 of 6 · Form 5
Analysis and interpretation of financial statements
Comparisons over time and with competitors; users' needs (investors, lenders, suppliers); limitations of ratio analysis; the importance of non-financial information.
Notes for this topic 1 file, in order
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Ratios
- Profitability: gross margin, profit margin, ROCE (profit from operations ÷ capital employed).
- Liquidity: current ratio, acid test ratio.
- Efficiency: inventory turnover, trade receivables and payables turnover in days, non-current asset turnover.
- Investment: gearing, interest cover, earnings per share, price/earnings ratio, dividend per share, dividend cover, dividend yield.
Worked example: Profit for the year attributable to ordinary shareholders US$450 000; 1 500 000 ordinary shares; market price US$3.60. Find EPS and P/E ratio.
EPS = US$0.30 → P/E = 3.60 ÷ 0.30 = 12
Interpretation
Comparisons over time and with competitors; users' needs (investors, lenders, suppliers); limitations of ratio analysis; the importance of non-financial information.
Ethics in accounting
Integrity, objectivity, professional competence and confidentiality; creative accounting.
Check yourself
- Profit from operations US$90 000; capital employed US$600 000. Find ROCE.
- Non-current liabilities US$200 000; capital employed US$800 000. Find gearing.
- Profit before interest US$120 000; interest US$15 000. Find interest cover.
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- 15%
- 25%
- 8 times
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