Analysis & Interpretation of

Financial Reports

AC2091: Financial Reporting

Session 13

1
Learning Outcomes
• interpret a set of accounts using a
number of techniques
• apply the pyramid of ratios and other
ratios to a set of accounts
• evaluate the information contained in
segmental analysis
• perform trend and vertical analysis
• discuss international differences in
accounting rules and reasons for these
differences

2
 Introduction

• Purpose of accounting
– Identifies, records, analyses and reports financial
information about an organization’s business
activities for the purpose of decision making
– Understandability and relevance of information in
financial statements
• Users may use various methods to interpret
financial information to make decisions

3
 Introduction

• Techniques in interpretation and analysis

– Business analysis
▪ Assess company’s risk and profit drivers
– Accounting analysis
▪ Assess the accounting policies of the company
– Trend analysis
▪ Comparison of performance across time
– Review of other qualitative information
– Ratio analysis
4
 Trend & Vertical Analysis

Types of Analysis
Method Description
Trend analysis ▪ Calculation of percentage changes in key financial
indicators
▪ Calculations can be made year-on-year or from
base point (i.e. reference year)
▪ Trends noted are analyse the changes and
determine any possible trends
Vertical analysis ▪ Use of common-size statements that express all
items in the financial statements as a percentage
of a single selected figure (e.g. turnover in the
income statement; total assets in the balance
sheet)
▪ Allows comparisons between companies
regardless of their size 5
 Horizontal Analysis

• Comparing a company’s financial condition

and performance across time.
– Change in Dollar Amount
Dollar Analysis Period Base Period
Change = Amount – Amount

– Change as a Percent
Percent Dollar Change
Change
=
Base Period Amount × 100

6
 Horizontal Analysis

• Example
Wild et el, Fundamental Accounting Principles, 21st Ed. (2016)

14,492 – 14,883 = (391)

[(391) ÷ 14,883] × 100 = (2.6)%

 Horizontal Analysis

• Example
Wild et el, Fundamental Accounting Principles, 21st Ed. (2016)

1,587 – 1,670 = (83)

[(83) ÷ 1,670] × 100 = (5.0)%

8
 Trend Analysis

• Examination of trends over a number of

accounting periods
– used to reveal patterns in data covering successive
periods

Trend Analysis Period Amount

= × 100
Percent Base Period Amount

9
 Trend Analysis

• Example Adidas
Income Statement Information
Wild et el, Fundamental Accounting Principles, 21st Ed. (2016)

Using 2009 as the base year we will get the following trend information:

Examples of 2013 Calculations for Net Sales:

2009 is base year. Set to 100%
2013: (14,492 ÷ 10,381) × 100 = 139.6%
 Vertical Analysis

• Comparing a company’s financial condition

and performance to a base amount
– Expression of all items as a percentage of a single
selected figure (i.e. common-size statements)
Common-size Analysis Amount ×
Percent = Base Amount 100

Financial Statement Base Amount

Statement of Financial Position Total Assets
Income Statement Revenues

To emphasize the relative importance of each item.

11
 Vertical Analysis
[Common-Size Financial Statements]
• Example
Wild et el, Fundamental Accounting Principles, 21st Ed. (2016)

(7,352 ÷ 14,492) × 100 = 50.7%

(7,780 ÷ 14,883) × 100 = 52.3%

 Vertical Analysis
[Common-Size Financial Statements]
• Example
Wild et el, Fundamental Accounting Principles, 21st Ed. (2016)

(1,587 ÷ 11,599) × 100 = 13.7%

(1,670 ÷ 11,651) × 100 = 14.3%

 Segmental Analysis

• Segmental information in the notes to the

accounts provides disaggregated information
on sales, profit and (sometimes) assets by
both geographic region and line of business
(where these different segments are
significant or material)

14
 Segmental Analysis

• Example
Adidas annual report (2013)
 Ratio Analysis

• Ratios represent the relationship between different

financial items in the accounts.
• Mathematical expression that links one item in
financial statements to another
• Information derived from:
– Statement of Comprehensive Income/ Income Statement
– Statement of Financial Position/ Balance sheet
– Statement of Changes in Equity
– Statement of Cash Flows
16
 Ratio Analysis

• Ratios are used to comment on the financial

position and performance of a business in
relation to its:
– past performance
– expected performance (as evidenced by budgets and
forecast financial statements)
– competitors’ performance (e.g. averages for the
industry)

17
 Ratio Analysis

• Limitations of ratio analysis:

– Change in accounting policies used by companies may
render ratios incomparable
– Accounting data may be distorted by
inflation/deflation
– Use of historical data may not be representative of
future performance
– Ratios cannot be used in isolation, i.e. need to be
compared with benchmark, competitors etc
18
 Ratio Analysis

• Limitations of ratio analysis:

– Difficulties in setting benchmarks as companies
operate in different industries
– Ratios are subject to seasonality of business and may
fluctuate throughout the year
– Challenges in assessing qualitative characteristics of
businesses (i.e. monetary concept)
– Ratios are not prescriptive or definitive – they merely
highlight areas of business that need attention
19
 Types of Ratios

Liquidity
Ratios

Shareholder Efficiency
Ratios Ratios

Profitability Gearing
Ratios Ratios 20
 Liquidity Ratios

• Measure ability to satisfy short-term obligations

as they come due
• Indicates short-term solvency of the business
• Poor liquidity may lead to delays in debt payment
and causes loss in confidence among lenders and
creditors

21
 Current Ratio

• Ability to meet its short-term obligations

(indicates firm’s short-term solvency)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
• 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
• Current assets include inventory, receivables as
well as cash and cash equivalents
• Recommended ratio depends on industry, though
generally a ratio of 2:1 is favoured

22
 Quick (acid-test) Ratio

• Ability to repay short-term commitments using

cash or near cash
• 𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 −𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 −𝑃𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
=
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
• High current ratio may be due to build-up of
inventory, high level of prepayments etc.

23
 Efficiency (Activity) Ratios

• Measure how efficiently the resources of the

business are being managed
• Indicates how well assets are utilized to generate
sales, i.e. efficiency in operations

24
 Inventory Turnover

• Frequency at which inventories are sold and

replaced during the year
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
• 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
• Low ratio may indicate slow-moving/obsolete
inventory or poor stock management
• Funds may be tied up in stock build-up
• Too high a ratio may also indicate risk of stock-out
25
 Inventory Turnover Period

• Average number of days’ sales in inventory

– Indicates average period of time inventory is held
before it is sold or used in production
• 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= 𝑋 365 𝑑𝑎𝑦𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠
365
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
• High ratio may indicate poor sales or inventory
management
26
 Accounts Receivable Turnover

• Number of times receivables are converted into

cash each year
• 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑣𝑖𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
• Higher ratio indicates shorter period between the
sale and the cash collection
• Shows efficiency of credit and collection policies
27
 Accounts Receivable Collection Period

• Average period for which receivables remain

outstanding
• 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑣𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑋 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
365
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
• Measures how many days (on average) it takes to
collect an account receivable
28
 Accounts Receivable Collection Period

• Used to evaluate credit control and efficiency of

debt collection
• High/increasing collection period may indicate
– Poor credit control/risk of irrecoverable debts
– Strategy to attract more customers
• Low/falling collection period may indicate:
– Extension of discounts/incentive for early payment
– Stringent credit terms may discourage customers
29
 Accounts Payable Turnover

• Number of times payables are paid each year

• 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
• Lower ratio indicates longer period between the
purchase and the cash payment
• Shows efficiency in meeting short-term
obligations and credit terms offered by suppliers
30
 Accounts Payable Payment Period

• Average time taken between purchase of

inventory on credit and payment for it
• 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
= 𝑋 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
365
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
• Indicates the credit terms as well as early
payment incentives/discounts extended by
suppliers to the business
31
 Asset Turnover

• Measures how effectively business is using its

assets to generate sales
• 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑆𝑎𝑙𝑒𝑠
=
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑜𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒
• Sales per dollar (or sterling pound) of assets
• Higher ratio indicates better efficiency in utilising
non-current and current assets (or capital
employed) to generate sales
32
 Non-Current Asset Turnover

• Measures how effectively business is using its

non-current assets to generate sales
• 𝑁𝑜𝑛 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑆𝑎𝑙𝑒𝑠
=
𝑁𝑜𝑛−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑜𝑟 𝑎𝑣𝑒𝑟𝑎𝑔𝑒)
• Ratio may be distorted by depreciation policies or
revaluation of non-current assets
• High ratio may indicate increased sales or low
asset valuation (or both)
33
 Gearing Ratios

• Gearing is the extent to which business is

financed by borrowings
• Indicates amount of leverage in the company as
well as its financial risk
• High gearing usually leads to higher risk since the
business’ operations is predominantly financed
by debt and is subject to interest obligations
– Interest is paid regardless of profitability
34
 Gearing (Debt-Equity) Ratio

• Concerned with capital structure of business

– Indicates proportion of assets financed by lenders
rather than shareholders
– Relative contribution of debt and equity in financing
the business
𝑁𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
• 𝐺𝑒𝑎𝑟𝑖𝑛𝑔 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
• Higher ratio leads to higher risk but also
magnifies the returns available to equity holders
35
 Debt to Total Asset Ratio

• Measures extent to which lenders and creditors

are financing assets of business
– Proportion of debt relative to assets
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
• 𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
• Used to determine company’s level of risk
– > 1 indicates more debt than assets and vice versa
– Higher ratio usually leads to more risk

36
 Interest Cover

• Measures ability of business to meet its regular

financial obligations
– how easy it is for the company to meet its interest
payments from its profits available
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
• 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
• High ratio indicates that lenders are in secure
position as business is more capable of cover its
interest payment
37
 Profitability Ratios

• Measures the financial performance of business

• Indicates how much profit the business makes in
relation to its sales, or asset base
• Assessment of company’s effectiveness in
generating profits from its assets

38
 Return on Equity (ROE)

• Measures return to shareholders

– Excludes long-term debt and their associated costs
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥
• 𝑅𝑂𝐸 =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑓𝑢𝑛𝑑𝑠 (𝑜𝑟 𝑜𝑤𝑛𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦)
• Pyramid of ratios
Return on equity

Financial
Return on capital
leverage
employed
multiplier
39
 Return on Capital Employed
(ROCE)
• Measures return earned from using company’s
capital resources
– Indicates organization’s efficiency in generating profits
from its capital
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥
• 𝑅𝑂𝐶𝐸 =
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
– Capital employed = Non-current liabilities + Equity

40
 Return on Capital Employed
(ROCE)/ Net Profit Margin
• 𝑅𝑂𝐶𝐸 = Net Profit Margin x Asset Turnover
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 & 𝑡𝑎𝑥
• Net Profit Margin = 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
– Profit the business makes on each of its sales
– Percentage of each sales dollar remaining after all
costs and expenses (including interest and taxes)
– Dependent on sales volume, pricing strategy etc.
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
• Asset Turnover = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
41
 Pyramid of Ratios

Return on equity

Financial leverage multiplier Return on capital employed

𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑓𝑢𝑛𝑑𝑠

Asset turnover Net profit margin

42
 Gross Profit Margin

• Measures proportion of each sales dollar or £

that is consumed by manufacturing sales
– Ability of business to sell goods for more than they
cost to make
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
• 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
– Differences between gross profit and net profit
margins can be attributed to operating expenses and
efficiency of cost control
43
 Shareholder Ratios

• Measures the performance of shares of a

business from the perspective of shareholders
• Indicates the security and returns of investment
made in company’s shares

44
 Share Capital & Reserves

Owner’s Equity

Share Capital Reserves

Ordinary Preference Distributable Non-

distributable
45
 Share Capital & Reserves

Types of Shares
Ordinary Shares Preference Shares
• Equity shares (i.e. • Non-equity shares (i.e. no
ownership rights) ownership rights)
• Voting Rights • No voting rights
• Receive residual dividend • Fixed dividend
payout • Rank before ordinary
• Rank last in asset shares in dividend payout
distribution in event of & asset distribution during
winding up liquidation
➢ Cumulative/Non-cumulative
➢ Redeemable <Non-Current Liability>
➢ Participating 46
 Share Capital & Reserves

Can be distributed as
dividends

Distributable (or
Only realised profits are
revenue)
distributed
reserves

E.g. retained earnings,

general reserves
Reserves

Cannot be distributed as
Non- dividends
Distributable (or
capital) reserves E.g. revaluation reserve,
share premium 47
 Share Capital & Reserves

• Share premium
• account records the difference between the nominal
value (par value) of shares issued and the fair value
of the consideration received
• can only be used for specific purposes:
• to pay up fully paid bonus shares
• to write off preliminary expenses
• to write off expenses of any issue of shares or debentures
• to write off commission paid or discount allowed on any
issue of shares or debentures
• to provide for the premium payable on any redemption
of debentures 48
 Share Capital & Reserves

• Bonus shares
➢ Shares issued to existing shareholders free of charge
➢ Issued in proportion to existing shares owned
e.g. one share for every 5 held or “1-for-5 issue”
➢ Should be issued out of capital (non-distributable)
reserves first before utilising revenue (distributable)
reserves
▪ Transfer between equity (e.g. from
share premium to ordinary share capital)
49
 Share Capital & Reserves

• Treasury shares
➢ ordinary shares that have been bought back
by the issuing company and are available for transfer
to appropriate persons, re-issue or resale
➢ reflected under shareholder equity as negative
balance on the Statement of Financial Position
➢ not entitled to dividends or rights and cannot be
used to vote or attend company meetings

50
 Earnings per Share

• Indicates how much of profit left over is available

to ordinary shareholders
– Company’s profitability and ability to pay dividends
• 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 & 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
– Requirement under IAS 33 Earnings per Share to
present EPS figure in the statement of comprehensive
income
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 Price Earnings ratio (PE ratio)

• Measure of market confidence in shares

– Indicates how many times’ the earnings an investor is
prepared to pay to buy a share
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
• 𝑃𝐸 𝑟𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
– high PE ratio usually indicates that the company’s
prospects are expected to be very good
– however, it may also mean that the share is
overvalued and not worth buying
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 Dividend Cover

• Measure of how many times the dividends paid

are covered by profits that were available for
distribution
– Indicates how many times’ the earnings an investor is
prepared to pay to buy a share
• 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐶𝑜𝑣𝑒𝑟
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 & 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
=
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑝𝑎𝑖𝑑
– Indicates how far earnings can fall before dividend
payout is reduced
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 Dividend Yield

• Measures cash return, received by way of

dividend, on the market price of the share
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑥 100%
• 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
– Based on current market share price, which may differ
from price paid to acquire the share
– Does not take into account growth in value of the
share (i.e. capital gain)

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 Cash Flow Statement

• Complements the use of ratios in analysis

– Businesses need to generate cashflow on top of
ensuring profitability
– Cashflow from operations: efficiency in generating
cash inflows from day-to-day activities
– Cashfow from investing activities: acquisition/disposal
of non-current assets or investments
– Cashfow from financing activities: equity and debt
financing, servicing of interest, repayment of loans
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 Differences in Financial Reporting

• Differences in financial reporting requirements

affect analysis and comparison of financial
statements
• Reasons for differences
– National legal systems (common vs civil law)
– Sources of funding (equity vs debt)
– Relationship between tax and accounting systems
– Influence and status of the accounting profession
– Influence of accounting theory on accounting practice
– Occurrences of company failures and financial
scandals
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 Differences in Financial Reporting

• Examples of differences
– Goodwill from business combinations
(amortisation, written off to equity or capitalised
indefinitely)
– Non-current assets (cost model vs revaluation
model for property, plant & equipment)
– Leases (finance vs operating leases)

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Thank You

Q&A

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