Interpretation of Accounts

Ratio Analysis

Key Areas for Analysis- Overview

Profitability Liquidity Management IT (no ratios) Return on Capital For exam critical, you must explain

Profitability

Gross profit

Gross profit/sales

Gross mark up

Gross profit/cost of sales

Net profit

Net profit/sales

Use abc on P44 of study notes

Profitability

2007 2008

Gross Profit 3700/7700= 48% 5500/10000= 55%

Mark Up 5500/4500= 122%

3700/4000=92.5%

Net Profit 2670/10000= 26.7%

1480/7700= 19.2%

Liquidity

Current ratio Current assets/current liabilities Acid ration (Current ratios-inventory)/current liabilities

Liquidity

2007 2008

Current ratio 1140/3150= 36% 1300/2085= 62.4%

Acid Ratio 700/3150=22.2% 640/2085=30.7%

Management Ratios

Receivables days (Receivables/sales)*365 Inventory days (Inventory/ Cost of sales)*365 Payables days (Payables/cost of sales)*365 Working capital cycle Receivable days + inventory days – payables days

Management Ratios

2007 2008

Receivables days

(320/7700)365=15

(400/10000)365= 15

Inventory days (500/4500)365= 41

(600/4000)365=55

Payables days (715/4500)365=58

(700/4000)365=64

WC Cycle 15+41-58= (2) 15+55-64=6

Return on Capital

Return on capital employedGross profit/capitalNet profit/capital

Return on capital employed

2008 2007

Gross return on capital employed

5500/5000=110%

3700/3555=104%

Net return on capital employed

2670/5000= 53.4%

1480/3555=41.6%

Banking Ratios

Interest Cover Profit before interest/Interest Gearing Debt/Equity or Debt/(Debt+Equity)

Banking Ratios

2007 2008

Interest Cover 2500/20= 125 4250/80=53

Gearing (Debt/equity)

125/3430= 3.6% 500/4500= 11.1%

Gearing (Debt/debt+equity)

125/125+3430= 3.5%

500/500+4500= 10%

Industry Specific Ratios

Asset Profitability Net/Gross Profit/(Carry value of assets) Utilisation Number of billable hours % of hotel rooms occupied