Lecture 2:

Financial Performance Analysis

Lau Chee Kwong

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Learning Outcomes
By the end of this lecture you should be able to:

 Identify and evaluate the key performance indicators

in the Statement of Comprehensive Income
 Assess items which are significant in the evaluation
of financial performance

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Financial Performance
 Financial performance of a firm has traditionally been
measured by its success generating earnings – the
“bottom line.”

Key Performance Ratios

1. Revenue/sales growth rate
2. Operating profit margin
3. Net profit margin
4. Earnings per share

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 Revenue/Sales Growth Rate
Measures expansion or contraction of the business

Current year revenues - Prior year revenues

Prior year revenues

Tesco plc:
2013 2012* 2011 2010 2009 2008
Net Sales 64,826 63,916 60,455 56,910 53,898 47,298
Growth rate 5.7% 6.2% 5.6% 13.9% 10.9%

Beware of inflation
* As at 23 Feb 2012

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Revenue Recognition

Revenue is the gross inflow of economic benefits during the period

arising in the course of the ordinary activities of an entity when
those inflows result in increases in equity, other than increases
relating to contributions from equity participants (IAS 18).

Revenue includes:
• Sale of goods
• Rendering of services
• Interest, royalties and dividends income

Nelson, M.W., Elliot, J.A. and Tarpley, R.L. (2003) How are earnings
managed? Accounting Horizon. Supplement, pp. 17-35

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Operating Profit Margin
 Measures overall performance of company’s
operations: sales revenue less expenses associated
with generating sales
 Given by Operating profit

Net sales
Tesco plc:

2013 2012 2011 2010 2009 2008

6.5% 6.5% 6.1% 5.9% 5.9%

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Net Profit/Earnings Margin
 Represents profit after consideration of all
revenue and expense
 Net profit margin shows the percentage of profit
earned on every sales dollar.
 Given by Net earnings
Net sales

Tesco plc:
2013 2012* 2011 2010 2009 2008
4.4% 4.4% 4.1% 4.0% 4.5%

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Earnings Per Share (EPS)

 EPS is the net earnings available to common

stockholders for the period divided by the average
number of common stock shares outstanding.

 If a firm has “complex” capital structure, it will

report basic and diluted earnings per common
share.

 IAS 33

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Earnings per Share

Tesco plc:

Basic EPS

2013 2012 2011 2010 2009 2008 2007

34.98p 33.10p 29.33p 27.14p 26.95p 23.61p

Diluted EPS
2013 2012 2011 2010 2009 2008 2007
34.88p 32.94p 29.19p 26.96p 26.61p 23.31p

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Common-Size Income Statement
• Expresses each income statement item as a
percentage of net sales

• Shows the relative magnitude of various

expenses relative to sales, the profit percentages,
and the relative importance of “other” revenues
and expenses

• Compare firms with different levels of sales or

total assets

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 Common size Income Statement
Year ended 27 Feb 2012* 2011 (Restated) 2010
Continuing operations
Revenue 64,539 100.0 60,455 100.0 56,910 100.0
Cost of sales (59,278) (91.8) (55,330) (91.5) (52,303) (91.9)
Gross profit 5,261 8.2 5,125 8.5 4,607 8.1
Administrative expenses (1,652) (2.6) (1,640) (2.7) (1,527) (2.7)
Other income 376 0.6 432 0.7 377 0.7
Operating profit 3,985 6.2 3,917 6.5 3,457 6.1
Profit from associate/JV 91 0.1 57 0.0 33 0.0
Finance income 176 0.3 150 0.3 265 0.5
Finance cost (417) (0.6) (483) (0.8) (579) (1.0)
Profit before tax 3,835 6.0 3,641 6.0 3,176 5.6
Taxation (879) (1.4) (864) (1.4) (840) (1.5)
Profit for the year 2,956 4.6 2,777 4.6 2,336 4.1

* As at 25 Feb 2012
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Continuing and Discontinued Operations

• IFRS 5 Non-current Assets Held for Sale and Discontinued

Operations defines a discontinued operation as a component
of a reporting entity that either has been disposed of, or is
classified as held for sale,

• Discontinued operations will not contribute to future

performance, both favorable or unfavorable.

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