Profitability & return

- PBIT
- PBT
- ROCE = PBIT/(Total assets-current liablity)
- ROE = Profit after tax &preference dividend/equity shareholders’ funds
- Profit margin
 Gross profit margin vs. net profit margin
- Asset turnover = sales/capital employed
 How well the assets of a business are being used to generate sales
 Expressed as x times
- Historical vs. current costs

Long-term solvency and stability

- Debt ratio
- Gearing/leverage ratio
- Financial gearing = prior charge capital/equity capital (including reserves)
- Operating gearing = contribution/PBIT
- Interest cover = PBIT/interest
- Cash flow ratio = net cash inflow/total debts
 Earning enough cash from operations to be able to meet its foreseeable debts and future
commitments

Short-term solvency and liquidity

- Current ratio = current assets/current liabilities
 Whether the co have enough current assets that give a promise of cash to come to meet its
future commitments to pay off its current liabilities
 Expected: >1; acceptable: 1.5
- Quick ratio/acid test ratio = (current assets – inventory)/current liability
 Where inventory turnover is slow and most inventories are not very liquid assets while
cash cycle is long
 Expected: at least > 1; acceptable: 0.8
- Implication:
 Different business
 Trend of these ratios: whether liquidity is deteriorating or improving
 The other side: these ratios can get bigger than they need to be
Efficiency/turnover:
- Accounts receivable collection period = trade receivables/sales x 365 days
* sales in IS exclude any cash sales; trade receivable in notes
 Trend: increasing year on year: poorly managed credit control function
- Inventory turnover period = inventory/ cost of sales x 365 days
 How vigorously a business is trading: a lengthening inventory turnover period from one
year to the next a slowdown in trading or a build-up in inventory levels, perhaps
suggesting that the investment in inventory is excessive
 The higher the inventory turnover the better, the lower the turnover period the better
 Need to balance: lead times, seasonal fluctuations in orders, alternative uses of ware house
space, bulk buying discounts, likelihood of inventory perishing or becoming obsolete
- Accounts payable payment period = trade accounts payable/purchases x 365 days
- Operating cycle = inventory turnover period + accounts receivable collection period – accounts
payable payment period

Shareholders’ investment ratios

Assess the value and quality of an investment in the ordinary shares of a company

- EPS
- DPS
- Dividend cover: EPS/DPS
 Proportion of profit for the year that is available for distribution to shareholders that has
been paid or proposed and what proportion will be retained in the business to finance
future growth
 2: 50% dividend; 50% finance future growth
 Significant change: profit fall?
- P/E ratio
 High P/E: strong shareholder confidence in the co and its future: profit growth
- Dividend yield = dividend on the share for the year/ current market value of share (ex div)
 The return a shareholder is currently expecting on the shares of a co

忽略以下这些

Measurement of financial instruments

- Initial measurement
 Fair value + transaction costs (directly attributable to the acqn or issue of financial
instruments)
 Fair value through profit or loss (transaction costs not included) – for those FI held for
trading
- Subsequent measurement
 Amortised costs
 Fair value
- Financial assets categories
 Held-to-maturity investments: fixed/determinable payments and a fixed maturity date
 Loans and receivables: fixed/determinable payments and not quoted in an active market
 Both these two are carried at amortised cost
 Available-for-sale: other comprehensive income