Financial Ratio Analysis - Index

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Financial Ratio Analysis
Financial Ratio analysis is a fascinating topic. To help you through this extensive resource we have broken it down into several sections and sub-sections. You may move between sections using the navigation in the left hand bar, move between each page in turn by following the links at the bottom of each page or jump to a topic using the list below:
q q q q q

Welcome Ratio Analysis 1: Profitability Ratio Analysis 2: Rate of Return Ratio Analysis 3: Working Capital Management 1: Liquidity Ratio Analysis 4: Working Capital Management 1 continued: Asset usage Ratio Analysis 5: Working Capital Management 2: Stock/debtors/creditors Ratio Analysis 6: Gearing Ratio Analysis 7: Investor Section Map Financial Ratios Database

q

q q q q

These ratio analysis materials were prepared for Biz/ed by Duncan Williamson: Duncan is a teacher, a freelance author and business consultant who prepares teaching/learning materials for accountants and students of accounting. Duncan maintains his own Web site at http://www.duncanwil.co.uk. The site contains many articles, essays and demonstrations of a wide variety of issues facing management and financial accountants. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Welcome to Ratio Analysis

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Welcome to Ratio Analysis!
Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy! Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway! The overall layout of this section is as follows: We will begin by asking the question, What do we want ratio analysis to tell us? Then, what will we try to do with it? This is the most important question, funnily enough! The answer to that question then means we need to make a list of all of the ratios we might use: we will list them and give the formula for each of them. Once we have discovered all of the ratios that we can use we need to know how to use them, who might use them and what for and how will it help them to answer the question we asked at the beginning? At this stage we will have an overall picture of what ratio analysis is, who uses it and the ratios they need to be able to use it. All that's left to do then is to use the ratios; and we will do that step- by-step, one by one. By the end of this section we will have used every ratio several times and we will be experts at using and understanding what they tell us. q What do we want ratio analysis to tell us?
q q q

What do the users of accounts need to know? Activity 1 : Which ratio for which group Brief review of the accounts of Tesco plc Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability

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Profitability
We will now examine profitability q Ratio Analysis 1: Profitability r Basic:
s s

Gross profit margin Net profit margin
s s s

Activity 2 : Carphone Warehouse profit margin Activity 3 : Vodafone profit margin Activity 4 : Advanced profitability (Additional question 1) Additional question 2 Additional question 3 Additional question 4

s s s r

Advanced:
s s s

Activity 5 : Carphone Warehouse profitability Additional question 5 Additional question 6

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Financial Ratio Analysis - Rate of Return

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Rate of Return
We will now examine Rate of Return q Ratio Analysis 2: Rate of Return r Basic:
s

Return on capital employed (ROCE)
s

Activity 6 : Vodafone ROCE Activity 7 : Vodafone ROTA Additional question 7 Activity 8 : ROCE and the Pyramid

s

Return on total assets (ROTA)
s s

s

Review of ROCE and the Pyramid of Ratios
s

r

Advanced:
s s

Return on fixed assets (ROFA) Return on working capital (ROWC)
s s s s

Additional question 8 Additional question 9 Additional question 10 Additional question 11

s

Review: Inter-firm and intra-sector analysis

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Financial Ratio Analysis - Working Capital Management 1: Liquidity

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Working Capital Management 1: Liquidity
Working capital management is concerned with making sure we have exactly the right amount of money and lines of credit available to the business at all times. In part 1 of our look at working capital management we will look at the liquidity ratios. Cash is the life-blood of any business, no matter how large or small. If a business has no cash and no way of getting any cash, it will have to close down. It's that simple! Following on from this we can see that if a business has no idea of its liquidity and working capital position, it could be in serious trouble. q Ratio Analysis 3: Working Capital Management 1: Liquidity r Liquidity ratios
r

The Current Ratio:
s s s

Activity 9 - Vodafone Current Ratio The Acid Test ratio Activity 10 : Vodafone Acid Test Additional question 12 Additional question 13 Additional question 14

r

An ideal ratio?
s s s

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Financial Ratio Analysis - Working Capital Management 1: Asset Usage

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Working Capital Management 1: Asset Usage
q

Ratio Analysis 3: Working Capital Management 1: Liquidity r Basic:
s

Total asset turnover
s

Activity 11 - Vodafone total asset turnover ratio

r

Advanced:
s

Split the Total Asset Turnover Ratio: fixed asset and current asset turnovers Fixed asset turnover Fixed Asset Turnover: Advanced 1
s s

s s

Current Asset Turnover Activity 12 - Vodafone Fixed and Current Asset Turnover ratios Capital Employed Turnover Activity 13 - Capital Employed Turnover Working Capital Turnover Activity 14 - Vodafone Working Capital Turnover

s

Fixed Asset Turnover: Advanced 2
s s s s

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Financial Ratio Analysis - Working Capital Management II

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Working Capital Management II
q

Ratio Analysis 5: Working Capital Management II: Stock/debtors/creditors r Introduction
r

Stock turnover
s

Activity 15 : Vodafone Stock Turnover

r r

Debtors' Turnover Debtors' Turnover Ratio: Advanced
s

Activity 16 : Vodafone debtors' turnover Additional question 15

r

Creditors' Turnover
s

r r

Creditors' Turnover: Advanced 1 Creditors' Turnover: Advanced 2
s s s s

Activity 17 : Vodafone creditors' turnover ratio Additional question 16 Additional question 17 Additional question 18

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Financial Ratio Analysis - Gearing

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Gearing
q

Ratio Analysis 6: Gearing r Gearing ratio 1
r

Gearing ratio 1
s s

Activity 18 : Vodafone gearing Additional question 19 Additional question 20 Additional question 21 Additional question 22 Additional question 23

r

Gearing ratio 2
s s s s

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Financial Ratio Analysis - Investor ratios

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Investor ratios
q

Ratio Analysis 7: Investor ratios r Basic:
r

Investor ratios
s

Earnings per share: EPS
s

Activity 19 : Vodafone EPS Activity 20 : DPS Activity 21 : Vodafone Dividend Yield Activity 22 : Dividend Cover Activity 23 : Vodafone P/E ratio

s

Dividends per Share: DPS
s

s

Dividend yield
s

s

Dividend Cover
s

s

Price Earnings Ratio: P/E ratio
s

r

Advanced:
s

Interest cover
s s s s

Activity 24 : Vodafone interest cover Additional question 24 Additional question 25 Additional question 26

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Financial Ratio Analysis - Section Map

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Financial Ratio Analysis - Section Map
Financial Ratio analysis is a fascinating topic. To help you through this extensive resource we have broken it down into several sections and sub-sections. You may move between sections using the navigation in the left hand bar, move between each page in turn by following the links at the bottom of each page: q Introduction
q

Welcome r Welcome to ratio analysis!
r r r r

What do we want ratio analysis to tell us? What do the users of accounts need to know? Activity 1 : Which ratio for which group Brief review of the accounts of Tesco plc

q

Ratio Analysis 1: Profitability r Basic:
s s

Gross profit margin Net profit margin
s s s

Activity 2 : Carphone Warehouse profit margin Activity 3 : Vodafone profit margin Activity 4 : Advanced profitability (Additional question 1) Additional question 2 Additional question 3 Additional question 4

s s s r

Advanced:
s s s s

Activity 5 : Carphone Warehouse profitability Activity 5 : Carphone Warehouse profitability Additional question 5 Additional question 6

q

Ratio Analysis 2: Rate of Return r Basic:
s

Return on capital employed (ROCE)

http://www.bized.ac.uk/compfact/ratios/sectionmap.htm (1 of 4) [25/09/2006 14:16:28]

Financial Ratio Analysis - Section Map
s s

Activity 6 : Vodafone ROCE Activity 7 : Vodafone ROTA Additional question 7 Activity 8 : ROCE and the Pyramid

Return on total assets (ROTA)
s s

s

Review of ROCE and the Pyramid of Ratios
s

r

Advanced:
s s

Return on fixed assets (ROFA) Return on working capital (ROWC)
s s s s

Additional question 8 Additional question 9 Additional question 10 Additional question 11

s q

Review: Inter-firm and intra-sector analysis

Ratio Analysis 3: Working Capital Management 1: Liquidity r Liquidity ratios
r

The Current Ratio:
s s s

Activity 9 - Vodafone Current Ratio The Acid Test ratio Activity 10 : Vodafone Acid Test Additional question 12 Additional question 13 Additional question 14

r

An ideal ratio?
s s s

q

Ratio Analysis 4: Working Capital Management 1 continued: Asset usage r Basic:
s

Total asset turnover
s

Activity 11 - Vodafone total asset turnover ratio

r

Advanced:
s

Split the Total Asset Turnover Ratio: fixed asset and current asset turnovers Fixed asset turnover Fixed Asset Turnover: Advanced 1
s s

s s

Current Asset Turnover Activity 12 - Vodafone Fixed and Current Asset Turnover ratios Capital Employed Turnover Activity 13 - Capital Employed Turnover

s

Fixed Asset Turnover: Advanced 2
s s

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Financial Ratio Analysis - Section Map
s s

Working Capital Turnover Activity 14 - Vodafone Working Capital Turnover

q

Ratio Analysis 5: Working Capital Management II: Stock/debtors/creditors r Introduction
r

Stock turnover
s

Activity 15 : Vodafone Stock Turnover

r r

Debtors' Turnover Debtors' Turnover Ratio: Advanced
s

Activity 16 : Vodafone debtors' turnover Additional question 15

r

Creditors' Turnover
s

r r

Creditors' Turnover: Advanced 1 Creditors' Turnover: Advanced 2
s s s s

Activity 17 : Vodafone creditors' turnover ratio Additional question 16 Additional question 17 Additional question 18

q

Ratio Analysis 6: Gearing r Gearing ratio 1
r

Gearing ratio 1
s s

Activity 18 : Vodafone gearing Additional question 19 Additional question 20 Additional question 21 Additional question 22 Additional question 23

r

Gearing ratio 2
s s s s

q

Ratio Analysis 7: Investor ratios r Basic:
r

Investor ratios
s

Earnings per share: EPS
s

Activity 19 : Vodafone EPS Activity 20 : DPS Activity 21 : Vodafone Dividend Yield Activity 22 : Dividend Cover

s

Dividends per Share: DPS
s

s

Dividend yield
s

s

Dividend Cover
s

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Financial Ratio Analysis - Section Map
s

Price Earnings Ratio: P/E ratio
s

Activity 23 : Vodafone P/E ratio

r

Advanced:
s

Interest cover
s s s s

Activity 24 : Vodafone interest cover Additional question 24 Additional question 25 Additional question 26

q

Financial Ratios Database

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Financial Ratio Analysis - Rate of Return

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Rate of Return
First some basic Rate of Return equations: Return on Capital Employed (ROCE) = Profit for the Year * 100 Equity Shareholders' Funds

Return on Total Assets (ROTA) =

PBIT * 100 Total Assets

The rate of return ratios are thought to be the most important ratios by some accountants and analysts. One reason why the rate of return ratios are so important is that they are the ratios that we use to tell if the managing director is doing their job properly. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Return on Capital Employed Ratio

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Return on Capital Employed Ratio
The Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company. Think of it this way: if we had a savings account with a bank and we'd been paid, say, £25 interest at the end of a year; and we had saved £500, we could work out the rate of interest we had earned: Rate of interest = Interest earned 25 1 100 * 100 = * 100 = * 100 = = 5% Amount saved 500 20 20

So, we have earned 5% interest on our savings. Imagine now that instead of talking about a savings account, we were talking about a company and the profit for the year and its capital employed had been £25 and £500 respectively then the ROCE for that company would be 5% too. ROCE = Profit for the Year 25 1 100 * 100 = * 100 = * 100 = = 5% Equity Shareholders' Funds 500 20 20

Did you notice that we use the Equity Shareholders' Funds instead of Capital Employed? In fact, they are different names for the same thing! We could call the ratio the Return on Shareholders' Funds (ROSF) just as easily if we wanted; but generations of accountants and students only know it as ROCE. In accounting, there can be different definitions of what certain terms mean. The use of the term 'capital employed' can mean different things. It can, for example, include bank loans and overdrafts since these are funds employed within the firm. Because there are different interpretations of what ROCE can mean, it is suggested that you use a method which you feel comfortable with but be aware that others may interpret your definition in a different way. Below is a guide to some of the interpretations that we have found on this issue. Source and/or Definition of Return Elliott & Elliott: ROCE = Net profit/capital employed Investor Words: Definition of Capital Employed Capital employed = total assets Capital employed = fixed assets + current assets - current liabilities Capital employed = ordinary share capital + reserves + preference share capital + minority interest + provisions + total borrowings - intangible assets TRADING capital employed = share capital + reserves + all borrowings including lease obligations, overdraft, minority interest, provisions, associates and investments OVERALL capital employed = share capital + reserves + all borrowings including lease obligations, overdraft, minority interest, provisions DTI Capital employed = total fixed assets + current assets - (current liabilities + long term liabilities + provisions) Capital employed = fixed assets + current assets - (creditors + provisions)

investopedia.com: Return = Profit before tax + interest paid

Holmes & Sugden: Return = trading profit plus income from investment and company share of the profit of associates

Johnson Matthey Annual Report & Accounts

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Financial Ratio Analysis - Return on Capital Employed Ratio

Let's calculate the ROCE for the Carphone Warehouse now; and here are the figures we need: Carphone Warehouse 31 March 2001 25 March 2000 £'000 Profit for the financial period Equity shareholders' funds Off you go! Did you get this? What do we think of these results? Well, the question we have to ask is "Could we have earned more money (profit) if we had invested in a different business or simply put our money in the bank?" Well, interest rates at the bank were somewhere around 4 or 5% in 2001 so we did better than that; but there are many businesses that have a ROCE of higher than 8 or 9%. Still, in 2000 the Carphone Warehouse had an ROCE of almost 37%: that's very good by all standards. So what went wrong between 2000 and 2001? What happened, it didn't necessarily go wrong, was that the capital employed increased from £44,190,000 to £436,758,000 (a 10 fold increase) BUT the profits increased from £16,327 to only £38,159... they only just about doubled. It's no surprise then that the ROCE fell so sharply as capital employed increased 5 times faster than the profit did. It will be interesting to see what 2002 brings for the Carphone Warehouse and their ROCE. We will look at Vodafone's ROCE shortly, but for interest here are some other ROCE values to compare with the Carphone Warehouse: Leisure International Manufacturer Retailer Discount Refining Pizza Accounting & Airline Airline Restaurants Software Hotels ROCE 5.56% 3.16% -12.12% -0.12% 33.63% 16.17% 16.14% 16.29% 38,159 436,758 £'000 16,327 44,190

Again, these other ROCE values demonstrate that not everyone can get the same results for the same ratio at the same time: it depends on the industry, the management, the economy and so on. The ROCE results in this new table relate to the Carphone Warehouse's results for the year ended 25 March 2000 of 36.95%. This is a good result as it shows that the business is effectively earning around 37% on the (investment) funds that the shareholders have invested in it. Contrast the other ROCE values with the Carphone Warehouse and we can see that only the discount airline has a ROCE value anywhere near it. The international airline's ROCE is extremely low at just over 3%. Wouldn't the shareholders be better off selling the business and putting the money in the bank as it would earn more than that? We should also compare these ROCE values with the profitability values. Let's just compare net profitability with the ROCE. Leisure International Manufacturer Retailer Discount Refining Pizza Accounting & Airline Airline Restaurants Software Hotels Net Profit ROCE 7.36% 5.56% 4.05% 3.16% -10.48% -12.12% 1.63% -0.12% 10.87% 33.63% 12.63% 16.17% 7.55% 16.14% 27.15% 16.29%

Putting the data from this table on a graph can help us to see if there is a relationship between them:

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Financial Ratio Analysis - Return on Capital Employed Ratio

There does seem to be a relationship between the net profit margin and the ROCE: the higher the net profit margin, the higher the ROCE. After all, the curve on this graph is not a straight line and it might even be a true curve meaning that the relationship is more complex than we might think. Keep an eye on this relationship whenever you assess the profitability of a business. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 6 - Vodafone ROCE

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Activity 6 - Vodafone ROCE
Here are the results for Vodafone for you to determine the ROCE for the two years: Vodafone 31 Mar 2002 31 Mar 2001 £m Profit for the financial period Equity shareholders' funds -16,155 130,573 £m -9885 145,007

Fill in this table to find the ROCE for each year: ROCE For Vodafone 31 March 2002 31 March 2001 Profit for the year Equity shareholders' funds Profit for the year Equity shareholders' funds _______________ = _____%

_______________

= _____%

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Financial Ratio Analysis - Return on Total Assets Ratio

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Return on Total Assets Ratio
The Return on Total Assets Ratio (ROTA) has a similar meaning to ROCE and the method of calculating it is the same, too. Let's work on ROTA with the Carphone Warehouse's figures: Return on Total Assets (ROTA) = PBIT * 100 Total Assets

Notice that we use a different profit figure for this ratio - we use profit before interest and tax this time. This is because we try to match the profit we use with the total assets that operating managers use. Accountants would say that interest payments and tax payments are separate from the ways in which the total assets are used. That is, if we are trying to measure the efficiency of our total assets, then take the profit that they have generated before interest and taxation. Interest and tax problems are the senior managers' concern, since they decide how much to borrow and therefore how much interest they ought to pay; senior managers decide on capital investment, too, and they have a big say in how much tax they pay for a year. Therefore, since operating managers can't control the amounts of interest and taxation paid, they should not be assessed against it. The Carphone Warehouse 31 March 2001 25 March 2000 £'000 Profit before interest and taxation Total Fixed Assets Total Current Assets Off you go ... fill in the blanks in this table: ROTA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Total Assets 25 March 2000 Profit before Interest and Tax Total Assets Did you get this? ______________ = _____% 45,012 396,175 315,528 £'000 25,300 100,279 171,160

______________ = _____%

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Financial Ratio Analysis - Return on Total Assets Ratio

What do we think about those results? Well, we can see a significant difference between ROCE and ROTA between the two years: the ROTA values are much more in line with each other. This is because we are now looking at profit before interest and tax and total assets - total assets increased by about three and a half times and profits almost doubled. AND, the amount of interest payments has increased by £2,581,000 in 2001 and that has made a big difference to this return. We can see perfectly with this example how we need to take out the impact of interest and tax if we want to understand how well the operational managers have done with their assets. Take a look at other businesses in the database to see how they have done with their ROTA and to see how interest and taxation has had an impact on their results. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 7 - Vodafone ROTA

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Activity 7 - Vodafone ROTA
Let's repeat these calculations, for Vodafone this time and see what we find for them. Consolidated profit and loss account 31 Mar 2002 31 Mar 2001 £m Profit before interest and taxation Total Fixed Assets Total Current Assets Fill in this table for Vodafone: ROTA For Vodafone 31 March 2002 Profit before Interest and Tax Total Assets 31 March 2001 Profit before Interest and Tax Total Assets Did you get this? Our conclusions? Vodafone's interest and tax situations are not a major factor here but Vodafone's main problem is its operating costs - they eat up all and more of its operating profit. We need to keep an eye on this because they can't sustain this situation for too many years. You can now attempt an additional question or move on to the next topic. Section Index | Previous | Next | Next Section | Section Map ____________ = _____% -12,694 153,462 9,438 £m -6909 154,208 18,182

____________ = _____%

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Financial Ratio Analysis - Rate of Return - Additional Question 7

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Additional Question 7
Now that you've read the resources on ROCE and ROTA here are the relevant data for Marks & Spencer to enable you to calculate the return on: . capital employed ratio b. total assets ratio What do you think of the performance of Marks & Spencer over these two years? Consolidated profit and loss for the year Marks & Spencer plc 2002 £m Profit for the financial period Equity shareholders' funds Total Fixed Assets Total Current Assets Did you get this? These results confirm what we saw when we discussed profitability for M&S: the results for 2002 are significantly better than the results for 2001. We can now see that not only has M&S improved its turnover and its profit but it has also managed its capital employed and its total assets more efficiently, too. However, we should stress that these rates of return ratios are not that spectacular. Interest rates at the bank, to take a very simple view, are around 4% so M&S hasn't done especially well in general terms: it's improved without doubt; but it has more improvements to make You can move on to the next topic. Section Index | Previous | Next | Next Section | Section Map 153.0 3,080.9 3,431.5 3,760.7 2001 £m -5.5 4,565.8 4,177.2 3,516.2

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Financial Ratio Analysis - Review of ROCE and the Pyramid of Ratios

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Review of ROCE and the Pyramid of Ratios
Return on Capital Employed Revisited There is a ratio analysis approach called the du Pont Technique or the Pyramid of Ratios Technique. We are not going to look at the whole pyramid technique and there is nothing new in it in terms of the ratios we might use; but it does contain an interesting feature. Here are the top two levels of the pyramid

ROCE is called the Primary Ratio because it is at the top of this pyramid. Moreover, every ratio in this pyramid feeds up into this primary ratio, along these lines: ROCE = Profit for the year margin x Capital Employed Turnover These relationships are very useful and we can see this better when we write the formulae out in full: Return on Capital Employed (ROCE) = and Profit for the Profit for * Capital Year ROCE = the Year = Employed Margin Turnover Turnover Turnover = Equity Shareholders' Funds Profit for the Year * 100 Equity Shareholders' Funds

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Financial Ratio Analysis - Review of ROCE and the Pyramid of Ratios

Notice how we use the name capital employed for the equity shareholders' funds helpful or what? It's true though. A business's capital employed is also equal to its net assets. When we put the profit margin and capital employed turnover ratios together and cancel, like we do in maths, we get the ROCE. Put it all together and you will see what we're driving at! Profit for the Year Profit for the Year Turnover = * Equity Shareholders' Funds Turnover Equity Shareholders' Funds When we cancel the common elements from the profit margin and capital employed turnover ratios, we get the ROCE ratio ... Profit for the Year Profit for the Year Turnover = * Equity Shareholders' Funds Turnover Equity Shareholders' Funds Giving ROCE = Profit for the Year Profit for the Year = Equity Shareholders' Funds Equity Shareholders' Funds

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Financial Ratio Analysis - Activity 8 - ROCE and the Pyramid

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Activity 8 - ROCE and the Pyramid
Let's put some numbers in the pyramid now to prove what we have just said. We've already see the ROCE in action with the Carphone Warehouse and Vodafone so why not go to the database of companies that goes with series and choose another company to work with? Here's a template for you: _________________________ plc Consolidated Profit and Loss Account £'000 £'000 Turnover Profit for the financial period Equity shareholders' funds Fill in the figures in the template below and then do the arithmetic:

Now that you have the ratio values, prove to your own satisfaction that ROCE = Profit Margin * Asset Turnover. Additional notes are available on advanced rate of return or you can move on to the Liquidity section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 8 - ROCE and the Pyramid

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Financial Ratio Analysis - Advanced Rate of Return

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Advanced Rate of Return
First some advanced Rate of Return equations: Return on Fixed Assets (ROFA) = PBIT * 100 Fixed Assets PBIT * 100 Working Capital

Return on Working Capital (ROWC) =

In addition to the ROCE and ROTA ratios, there are other ratios that will help us to appreciate the efficiency with which the management is using its resources. Here are two ratios that help us with this further analysis. Remember that with the ROTA we used PBIT for our numerator (that's the number on the top of the formula). We use the same measure of profit for the Return on Fixed Assets (ROFA) and the Return on Working Capital (ROWC). Let's have a look. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Return on Fixed Assets

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Return on Fixed Assets
We'll use the Carphone Warehouse's results to demonstrate these new ratios. Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 Profit before interest and taxation Total Fixed Assets Net current assets (liabilities) Fill in this table and calculate the ratio values: ROFA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Fixed Assets 25 March 2000 Profit before Interest and Tax Fixed Assets Did you get this? A large difference between the results for the two years; 2001's performance was just less than half of 2000's result. We are assessing the efficiency of fixed assets and 25% is probably respectable. However, 11% is another matter and suggests a major change in efficiency between the two years. Let's look at some other figures from the accounts that should help to explain what has happened to make this ratio fall so dramatically. The cost of sales has increased by 64% over the year and operating costs have increased by 37%; turnover has increased by 59% over the year The Carphone Warehouse Consolidated Profit and Loss Account 31 March 2001 25 March 2000 ___________ = _____% 45,012 396,175 93,180 £'000 25,300 100,279 -2,660

___________ = _____%

£'000 Turnover 1,110,678

£'000 697,720

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Financial Ratio Analysis - Return on Fixed Assets

Cost of sales Gross profit Operating expenses Operating profit Other costs/income Profit before interest and taxation

-830,126 280,552 -176,960 66,016 -21,004 45,012

-505,738 191,982 -129,359 41,389 -16,089 25,300

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Financial Ratio Analysis - Return on Working Capital

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Return on Working Capital
Without any help from us, you have all of the data (repeated below) to enable you to calculate the ROWC ratio for the Carphone Warehouse ... do that and interpret what you find. Consolidated Profit and Loss Account 31 March 2001 25 March 2000 £'000 Profit before interest and taxation Total Fixed Assets Net current assets (liabilities) 45,012 396,175 93,180 £'000 25,300 100,279 -2,660

ROWC For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax Working Capital 25 March 2000 Profit before Interest and Tax Working Capital ___________ = _____%

___________ = _____%

You will find this additional information of use for your analysis: Carphone Warehouse Consolidated Balance Sheet Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand Total Current Assets Creditors: Amounts falling due within one year Net current assets (liabilities) 31 March 2001 25 March 2000 £'000 52,437 149,200 46,374 67,517 315,528 -222,348 93,180 £'000 51,842 82,826 11,144 25,348 171,160 -173,820 -2,660

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Financial Ratio Analysis - Return on Working Capital

Did you get this? There has been a major improvement in ROWC between the two years there is now a positive working capital balance. In 2000 there was a negative balance. Moreover, whilst current liabilities have increased by 28%, other aspects of working capital have increased sufficiently to more than offset that. The Carphone Warehouse is in a much better position in 2001 than it was in 2000. You can now attempt some additional questions or move on to Inter-firm Comparisons Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Rate of Return - Additional Question 8

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Additional Question 8
In addition to the two rate of return ratios you calculated for question 7, calculate the following two ratios and comment on your findings: . return on fixed assets ratio b. return on working capital ratio You are given the following additional information to help you: for the year 2002 2001

Creditors: Amounts falling due within one year 1,750.8 1,981.6 Did you get this? Fixed assets are being dramatically better managed by M&S now since that ratio has increased three-fold and the return on working capital ratio has also improved, but this improvement is more in line with the other rate of return ratios and general profitability, by just about doubling from 2001 to 2002. You can move on to the next question. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Rate of Return - Additional Question 9

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Additional Question 9
Comment on the performance of Tesco plc for the five years 1998 - 2002 as shown in the table that follows. Highlight anything exceptional you might find. Tesco plc Year ended February Financial Statistics £m Group turnover Turnover by geographical area UK Rest of Europe Asia Group underlying operating profit UK Rest of Europe Asia 14,971 15,835 16,958 18,372 20,052 1,481 0 912 875 37 0 1,167 156 965 919 48 -2 1,374 464 1,043 993 51 -1 1,756 860 1,174 1,100 70 4 2,203 1,398 1,332 1,213 90 29 16,452 17,158 18,796 20,988 23,653 1998 1999 2000 2001 2002

Profit on ordinary activities before taxation Profit for the period

760 532

842 606

933 674

1,054 722

1,201 830

Tesco plc Rates of return Return on shareholders' funds Return on capital employed Did you get this?

1998

1999

2000

2001

2002

21.30% 21.30% 20.90% 22.70% 23.20% 18.70% 17.20% 16.10% 16.60% 16.10%

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Financial Ratio Analysis - Rate of Return - Additional Question 9

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Financial Ratio Analysis - Rate of Return - Additional Question 10

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Additional Question 10
The table below contains both financial and non-financial data for Tesco plc. q compare group statistics with UK statistics in whichever way you think is best q calculate the turnover and profit per employee together with the sales per sq foot values q analyse your results to parts 'a' and 'b' and state the conclusions you draw. Tesco plc Year ended February Group statistics Number of stores Total sales area - 000 sq ft Full-time equivalent employees UK retail statistics Number of stores Total sales area - 000 sq ft Average store size (sales area - sq ft) Full-time equivalent employees UK retail productivity £ Turnover per employee Profit per employee Weekly turnover per sq ft Wages per employee 15,079 15,271 15,600 16,087 16,821 618 15,215 25,490 639 15,975 25,627 659 16,895 26,641 692 17,965 27,636 729 18,822 28,576 781 18,254 821 21,353 845 24,039 907 28,362 979 32,491 1998 1999 2000 2001 2002

119,127 126,914 134,896 152,210 171,794

99,941 104,772 108,409 113,998 121,272

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Financial Ratio Analysis - Rate of Return - Additional Question 10

Note: sq ft = square foot or square feet and there are around 11 square feet in a square metre Did you get this. You can move on to the next question. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Rate of Return - Additional Question 11

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Additional Question 11
Go to the database and find the data for both British Airways plc and easyJet plc that will allow you to calculate and comment on the following ratios: q return on capital employed q return on total assets ADVANCED return on fixed assets return on working capital British Airways is an old and well-established airline and easyJet is a new discount airline. Do these ratios help you to show that?

q q q

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Financial Ratio Analysis - Inter-firm Comparisons

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Inter-firm Comparisons
Let's take a look now at some of what we have talked about so far but in a different way. Here are the return on assets (ROA) and net profit margin values for several companies in the same (retailing) industry. What can we say about these results? Company Industry ROA 4.43% 5.60% 8.43% 26.14% 19.78% 9.13% 7.24% 12.93% 9.99% Profit Margin 3.91% 3.61% 6.45% 13.82% 14.41% 13.34% 4.14% 5.87% 5.72%

Marks & Spencer Retailer and Financial Services J Sainsbury Thorntons Next Dixons Group Yates Group Safeway Morrisons Tesco Retailer and Financial Services Retailer of Chocolates etc Retailer of Clothing Retailer of Electronic etc Goods Retailer of Food Retailer of Food Retailer of Food Retailer of Food and Household Goods

Textbooks might lead us to expect that the ROA and Profit Margins for each company in an industry ought to be the same as each other - we don't see that here do we? To try to isolate some patterns, though, we should classify this table even more than it has been already. What we mean is, look at the food retailers as a sub-group then look at the other major classifications and see if that helps to sort out what we are looking at. Here's the above table reorganised ... does it help? Averages Company Industry ROA Profit Margin ROA Profit Margin

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Financial Ratio Analysis - Inter-firm Comparisons

Marks & Spencer

Retailer Clothing, Food and Financial Services Retailer of Clothing Retailer of Chocolates etc Retailer of Electronic etc Goods

4.43%

3.91%

15.29% 26.14% 13.82% 8.43%

8.87%

Next Thorntons

6.45%

Dixons Group

19.78%

14.41%

Yates Group Retailer of Food Safeway Morrisons Tesco Retailer of Food Retailer of Food Retailer of Food and Household Goods Retailer Food and Financial Services Average

9.13% 7.24% 12.93% 9.99%

13.34% 4.14% 5.87% 8.98% 5.72% 6.54%

J Sainsbury

5.60%

3.61%

11.52%

7.92%

Well, our sample of businesses in each sub-group is too small, apart from those that specialise in retailing food, where we have a sample size of five. There we can see that our average (arithmetic mean) gives a reasonable view of the group. We can see that the sub-group for Marks and Spencer and Next does not give us such useful results, because there are only two businesses in the sample and the results for each business are significantly different from the other business. The overall average for entire sector is also useful for us as it gives us a benchmark against which to assess all of the businesses within it. We can use this kind of analysis with all of the ratios we calculate and that will give us an excellent insight into individual businesses as well as the industries and the sectors for which we have data. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Inter-firm Comparisons

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Financial Ratio Analysis - Liquidity ratios

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Liquidity ratios
Current Assets: Current Liabilities (Current Assets-Stocks): Current Liabilities The two liquidity ratios, the current ratio and the acid test ratio, are the most important ratios in almost the whole of ratio analysis are also the simplest to use and to learn. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - The Current Ratio

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The Current Ratio
The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this: Current Assets: Current Liabilities = x: y eg 1.75: 1 The Carphone Warehouse is our business of choice, so here is the information to help us work out its current ratio. Consolidated Balance Sheet 31 March 2001 25 March 2000 £'000 Total Current Assets Creditors: Amounts falling due within one year 315,528 222,348 £'000 171,160 173,820

As we saw in the brief review of accounts section with Tesco's financial statements, the phrase current liabilities is the same as Creditors: Amounts falling due within one year. Here's the table to fill in. OK, so we've done this one for you! Current Ratio For the Carphone Warehouse 31 March 2001 Current Assets: Current Liabilities 25 March 2000 Current Assets: Current Liabilities 315,528: 222,348 1.42: 1 171,160: 173,820 0.98: 1

Maths revision. How did we get 1.42: 1 for the year ended 31 March 2001? All we did was to divide the current assets by the current liabilities and that gives us: current assets 315,528 = = 1.42 current liabilities 222,348 so we automatically know that our ratio is 1.42: 1 The same with the year before: current assets 171,160 = = 0.98 current liabilities 173,820 so the ratio is 0.98: 1

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Financial Ratio Analysis - The Current Ratio

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Financial Ratio Analysis - Activity 9 - Vodafone Current Ratio

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Activity 9 - Vodafone Current Ratio
Work through the data for Vodafone and calculate their current ratio for the two years for which you have data. Vodafone Consolidated Balance Sheet 31 March 2002 31 March 2001 £m Total Current Assets Creditors: Amounts falling due within one year Fill in this table and discuss what you find: Current Ratio For Vodafone 31 March 2002 Current Assets: Current Liabilities 31 March 2001 Current Assets: Current Liabilities Did you get this? Vodafone has done almost the exact opposite of the Carphone Warehouse with its current ratio. This additional information might help your analysis. Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand Total Current Assets Creditors: Amounts falling due within one year Net current assets (liabilities) 2002 £m 2001 £m 513 7,053 1,792 80 9,438 13,455 -4,017 316 4,587 13,211 68 18,182 12,377 5,805 _____: _____ ___: 1 _____: _____ ___: 1 9,438 13,455 £m 18,182 12,377

Vodafone has liquidated, or sold, many of its short-term investments. This business has grown at a very rapid rate and has possibly used the

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Financial Ratio Analysis - Activity 9 - Vodafone Current Ratio

cash from having sold its investments to finance that expansion. Overall, Vodafone has lost almost £10 billion of working capital as it has fallen from £5.8 billion to -£4.0. This has left Vodafone in a weak working capital position as its creditors are large but its cash and short-term assets balances are small by comparison. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - The Acid Test Ratio

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The Acid Test Ratio
The acid test ratio is also known as the liquid or the quick ratio. The idea behind this ratio is that stocks are sometimes a problem because they can be difficult to sell or use. That is, even though a supermarket has thousands of people walking through its doors every day, there are still items on its shelves that don't sell as quickly as the supermarket would like. Similarly, there are some items that will sell very well. Nevertheless, there are some businesses whose stocks will sell or be used slowly and if those businesses needed to sell some of their stocks to try to cover an emergency, they would be disappointed. Engineering companies can have their materials in stock for as much as 9 months to a year; a greengrocer should have his stocks for no longer than 4 or 5 days - a good greengrocer anyway. We'll look at the stock turnover ratio in detail later but here's the acid test ratio for the Carphone Warehouse. Acid Test Ratio = (Current Assets - Stocks) : Current Liabilities We can take the figures we need from the current ratio section and then do the calculations. Here are the acid test ratios for the year ended 31 March 2001: Fill in this table and discuss what you find: Acid Test Ratio For Carphone Warehouse 31 March 2001 Current Assets - Stocks: Current Liabilities 25 March 2000 Current Assets - Stocks: Current Liabilities Did you get this? We need to put the current and acid test ratios side-by-side to help us to understand what is happening to the business: Comparison Current Acid Test 2001 2000 1.42: 1 0.98: 1 1.18: 1 0.69: 1 _____: _____ ___: 1 _____: _____ ___: 1

The fact that the differences between the current and acid test ratios are not too large tells us that the Carphone Warehouse stocks are not that

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Financial Ratio Analysis - The Acid Test Ratio

large either. The stocks are worth around £52 million in 2001; but since current assets are £315 million, that's not a huge level of stock holdings. Additionally, the acid test ratio has increased over the two year period, meaning that the Carphone Warehouse has a stronger liquidity position than it had before. Normally that is a good thing. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 10 - Vodafone Acid Test Ratio

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Activity 10 - Vodafone Acid Test Ratio
As you must expect now, it's your turn to go back to Vodafone's net current asset information and calculate its acid test ratios for the two years for which we have data. Fill in this table and discuss what you find: Acid Test Ratio For Vodafone 31 March 2002 Current Assets - Stocks: Current Liabilities 31 March 2001 Current Assets - Stocks: Current Liabilities Did you get this? As we did with the Carphone Warehouse, let's put the current and acid test ratios side-by-side to help us to understand what is happening to the business: Comparison Current Acid Test 2001 2000 0.70: 1 1.47: 1 0.66: 1 1.14: 1 _____: _____ ___: 1 _____: _____ ___: 1

We saw that Vodafone's liquidity position had worsened when we looked at its current ratio. Well, given that the level of stock it carries have increased by around 65% over the years, the acid test ratio has fallen from 2001 to 2002. We don't know how serious that fall is for the overall health of the business but we do know that Vodafone is not in a very healthy state at the moment. Current assets might not be that liquid since almost 80% of them are debtors. It does have £1.8 billion of short-term investments that it might sell to pay its bills if necessary. Vodafone has almost no cash. When we look at debtors we will see how liquid they are. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 10 - Vodafone Acid Test Ratio

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Financial Ratio Analysis - Ideal Ratio

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No such thing as an Ideal Ratio
It's time to say that whatever you've read about the ideal current ratio being 2:1 and the ideal acid test ratio being 1: 1 forget it! This is a golden rule ...there's no such thing as an ideal current ratio or acid test ratio ... or an ideal any other ratio for that matter. We still need to know whether 0.98: 1 and 1.42: 1 are good results, though. For the Carphone Warehouse, there has been a major turnaround between the two years as the ratio has increased from 0.98: 1 to 1.42:1. Look at the accounting information above and you can see that whilst the business has increased its sales by 59% over the two years, its stocks are almost unchanged; debtors have increased by 80%, investments by 316% and cash by 166%. As always, we have to point out that we only have two years' worth of data so any conclusions we can draw have to be done cautiously. You can now attempt some additional questions or move on to Asset usage Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Liquidity - Additional question 12

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Liquidity - Additional question 12
Go to the database and calculate 1. the current (working capital) ratio and 2. the acid test (liquid or quick) ratio for each of the following retailing companies q Marks & Spencer q Safeway q J Sainsbury plc q Tesco plc q Thorntons Comment on your findings for parts 'a' and 'b' of this question. Did you get this? Try the next question. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Liquidity - Additional question 13

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Liquidity - Additional question 13
Go to the database and calculate 1. the current (working capital) ratio and 2. the acid test (liquid or quick) ratio for each of the following Transport Sector companies q BAA q British Airways q easyJet Comment on your findings for parts 'a' and 'b' of this question. Did you get this? Try the next question. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Liquidity - Additional question 14

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Liquidity - Additional question 14
Compare and comment on the current and acid test ratio results you got for the retailing and transport businesses in questions 12 and 13 respectively. Is there such a thing as an ideal current and acid test ratio value? Did you get this? Now move on to Asset usage Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Asset Usage

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Asset Usage
The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. The basic equations for this section are: Total Asset Turnover = Turnover Total Assets

Stock Turnover =

Average Stocks Credit Sales/365 Average Debtors Credit Sales/365 Average Creditors Credit Sales/365

Debtors' Turnover =

Creditors' Turnover =

The assessment of asset usage is important as it helps us to understand the overall level of efficiency at which a business is performing. Our basic ratios for this section are Total asset turnover - The overall efficiency of the business. We will look at total asset turnover and net asset turnover; then we will investigate the fixed and current asset turnover ratios. Stock turnover, Debtors' turnover and Creditors' turnover help us to assess the liquidity position as well as giving us detailed information about stock control and credit control. We'll look at total asset turnover first and then we'll look at the other three together, under the general heading of working capital management II. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Total Asset Turnover

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Total Asset Turnover
The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover. In its simplest terms, we are just saying that for every £1 of assets, the turnover is £x. The formula for total asset turnover is: Total Asset Turnover = Turnover Total Assets

As usual, we'll take a look at the Carphone Warehouse's total asset turnover ratios first, for practice, and then we'll try to work out what we've found. Here are the figures we need: Carphone Warehouse 31 March 2001 25 March 2000 Consolidated Profit and Loss Account £'000 Turnover Total Fixed Assets Total Current Assets 1,110,678 396,175 315,528 £'000 697,720 100,279 171,160

Total Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 396,175 + 315,528 697,720 100,279 + 171,160 = 1.56 times = 2.57 times

We see the result of 1.56 times for 2001 ... this means that turnover is 1.56 times bigger than total assets. Another way of saying that is that the Carphone Warehouse was able to generate sales of £1.56 for every £1 of assets it owned and used for the year ended 31 March 2001. For the year ended 25 March 2000, it was even higher at 2.57 times. The Total Asset turnover ratio has worsened a lot over the two years. If 2.57 times was good, then 1.56 times is definitely worse. Can we see why this ratio fell so sharply? Actually, it's not as bad as it seems. Turnover increased by 59% but fixed assets increased by 295% and current assets by 84%. Here we have one of those cases where a ratio is falling in value but the

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Financial Ratio Analysis - Total Asset Turnover

underlying changes might not be so bad. That is, the Carphone Warehouse has made major investments in its assets that have yet to generate their previous level of sales: 1.56 times versus 2.57 times. However, we should say that we expect that next year this ratio should improve again. Let's have some bad news, though. Over the four years to 2001, this is the Carphone Warehouse's Net Asset Turnover Ratio profile: Net Asset Turnover Ratio 2001 2000 1999 1998 Net Asset Turnover 2.27 7.05 5.03 6.17

What are the signs telling us? Take a look at this graph:

The Carphone Warehouse is growing steadily in terms of turnover and its asset base. However, the very high net asset turnover ratio values came when the turnover and asset values were low, so mathematically this can often mean that the ratio is very likely to be high. So, it's not always bad when a ratio falls - it should recover, though, as the additional assets start to generate more sales and profit in the coming months. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 11 - Vodafone total asset turnover ratio

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Activity 11 - Vodafone total asset turnover ratio
Let's see what we find when we analyse Vodafone's total asset turnover ratio. Go to the database and find the data you need for these calculations then calculate the total asset turnover ratios and tell us what you have found. Did you get this? Did you think these were terrible results? Me too! Especially when we compare it with the Carphone Warehouse's results which were 1.56 and 2.57 for its latest two years respectively - significantly better than Vodafone's turnover ratio results. History shows us Vodafone's total asset turnover ratio looks like this: Vodafone plc 2002 2001 2000 1999 1998

Total Asset Turnover Ratio 0.14 0.09 0.05 0.91 0.96 It's been terrible for three years now, but it might be that 2001 was the worst year. This graph might help us to understand the underlying picture, too:

We can see now that Vodafone grew phenomenally quickly from 1999 to 2000 and although it is still a large company, it isn't growing at the same rate. Moreover, its assets have grown at a much quicker rate than its turnover. This could suggest that Vodafone is investing very heavily it its future. We would expect to see major
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Financial Ratio Analysis - Activity 11 - Vodafone total asset turnover ratio

improvements over the coming years just as we would for the Carphone Warehouse. We have to say, though, that Vodafone's total asset turnover ratio has never been that good. Additional notes are available on advanced asset usage or you can move on to the Stocks, Debtors and Creditors section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Advanced Asset Usage

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Advanced Asset Usage
The advanced equations for this section are: Fixed Asset Turnover = Turnover Fixed Assets Turnover Current Assets Turnover Equity Shareholders' Funds

Current Asset Turnover =

Capital Employed Turnover =

Working Capital Turnover =

Sales Working Capital

Look at this as we try to unravel the more involved aspects of asset usage or turnover: Vodafone plc Consolidated balance sheet Fixed assets Intangible Assets Tangible assets Investments Total Fixed Assets 105,944 18,541 28,977 153,462 108,853 10,586 34,769 154,208 31 Mar 2002 31 Mar 2001 £m £m

Look where the growth in assets is taking place - intangible assets. These intangible assets seem to have appeared between 1999 and 2000 and are probably the reason for such a dreadful total asset turnover ratio. Incidentally most of the intangible assets are goodwill, by the way. For the sake of argument, if we assumed that the goodwill had been around £100 million since it first appeared and then recalculated the total asset turnover ratio, we would find: Vodafone plc 2002 2001 2000 1999 1998

Adjusted Total Asset Turnover Ratio 0.36 0.21 0.15 0.91 0.96
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Financial Ratio Analysis - Advanced Asset Usage

Making this adjustment makes a difference and it helps us to understand the underlying trend in the total asset turnover ratio; and taking goodwill into account in the way we have is the kind of adjustment that a financial analyst might make were he to look at Vodafone's financial statements. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Split the Total Asset Turnover Ratio

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Split the Total Asset Turnover Ratio: fixed asset and current asset turnovers
Let's take a more detailed look at asset usage and efficiencies now by splitting down the total asset usage ratio into its component parts. We know that total asset turnover matches the turnover of a business with all of the assets it has used to generate that turnover - the bigger the value of the ratio the better. We can break this ratio into two to start with so that we can see in more detail how those assets have been used. The two ratios we will look at are: Fixed Asset Turnover = Turnover Fixed Assets Turnover Current Assets

Current Asset Turnover =

Let's find the data for the Carphone Warehouse, do the calculations and then discuss what we have found. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Fixed Asset Turnover

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Fixed Asset Turnover
The data: Carphone Warehouse Consolidated Profit and Loss Account for the year ended Turnover Total Fixed Assets Total Current Assets The calculations Fill in the figures and calculate the ratio values Fixed Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 __________ 25 March 2000 __________ times times 31 March 2001 25 March 2000

£'000 1,110,678 396,175 315,528

£'000 697,720 100,279 171,160

Did you get this? What did you think of those results? Well, 2001's result is less than 50% of 2000's result, which is poor on the face of it. 2001 Turnover Total Fixed Assets 2000 Change 2000 - 2001 59.19% 295.07%

1,110,678 697,720 396,175 100,279

In the situation we see here, we will always find that whilst the business is growing, it is growing in such a way that its ratios cannot stay constant. Here we have a 59% increase in sales and a 295% increase in fixed assets: this is bound to mean that the fixed asset turnover will get worse. What this means is that whilst the business has invested heavily in new fixed assets, turnover has not increased enough to reflect the new investments. We expect to see a major improvement in this ratio next

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Financial Ratio Analysis - Fixed Asset Turnover

year. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Fixed Asset Turnover: Advanced 1

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Fixed Asset Turnover: Advanced 1
We can investigate a little bit further, though, as we did with the total asset turnover ratio before we can make our final assessment. However, we need to look at which of the fixed assets have increased so much in case it's not as simple as it might look: Carphone Warehouse 31 March 2001 25 March 2000 Consolidated Balance Sheet Fixed assets Intangible Assets Tangible assets Investments Total Fixed Assets £'000 231,471 120,278 44,426 396,175 £'000 26,933 63,190 11,584 100,279

Whilst tangible fixed assets such as land, buildings, machinery and so on have doubled and investments have quadrupled, the largest increase of all is in intangible assets. The notes to the financial statements in the Carphone Warehouse's annual report shows us that the majority of the intangible asset came from the goodwill arising from having bought the rest of the shares in a business in which it already had a 76% holding in. Here are those notes: Intangible fixed assets: goodwill ... extract Group Cost At 25 March 2000 27,167 £'000

Acquisition of minority interests in the Group (see note 12a) 169,050 Other acquisitions Amounts written off ... Foreign exchange At 31 March 2001 Net book value At 31 March 2001 At 25 March 2000
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42,580 1,776 340 240,913

231,471 26,933

Financial Ratio Analysis - Fixed Asset Turnover: Advanced 1

Acquisition of minority interests in the Group On 22 June 2000, the Company acquired 24% of the issued share capital of The Phone House Holdings (UK) Limited, a company registered England in which it already had a 76% interest, in exchange for 81.9m shares in the Company. The shares in the Company had a fair value of £104.1m, giving rise to goodwill on acquisition of £105.9m. On 14 July 2000, the Company acquired all minority interests in The Phone House SA (France), Phone Warehouse SL (Spain) and Polirent Comercio e Aluguer de Bens e Servicos LDA (Portugal), in exchange for 31.3m shares in the Company. The shares in the Company had a fair value of £62.5m, giving rise to goodwill on acquisition of £63.1m. The Carphone Warehouse's accounting policy on goodwill is: Intangible assets - goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight line basis over its useful economic life of 20 years. Source: Carphone Warehouse Annual Report - page 30 [PDF] Let's adjust for the goodwill. For 2001 let's take out all £169,050,000 of it and see the impact that has on the fixed asset turnover ratio. Adjusted Fixed Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 396,175 - 169,050 697,720 100,279 4.89 times 6.96 times

Good, now the change is not so dramatic - it has fallen by only 30% now. Still fixed assets have changed at a quicker rate than turnover so we are still looking for improvements next year. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Current Asset Turnover

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Current Asset Turnover
Along with the basic data we need to calculate the current asset turnover ratio, we have provided the rates of change for each component, too. Use this additional information in your analysis, as we have done with the fixed asset turnover ratio. Carphone Warehouse Turnover Total Current Assets 2001 2000 Change 2000 - 2001 59.19% 84.35%

1,110,678 697,720 315,528 171,160

Fill in the blanks with the data from the above table. Current Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 __________ 25 March 2000 __________ times times

Did you get this? Given the rates of change in the turnover and current assets, 59% and 84%, this result has behaved exactly as we would have expected: when the rate of increase in current assets is higher than the rate of increase in turnover, the ratio will fall. Given the increase in investment in current assets this year, however, we need to see this ratio improving next year at least. Cross-reference: now that we know that the current asset turnover ratio has worsened a little, we need to monitor the effect of this change in detail in our review of the three working capital ratios we are about to look at: stock, debtors' and creditors' turnover. Two of these are part of the current assets turnover ratio and therefore have some influence on its value. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Current Asset Turnover

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Financial Ratio Analysis - Activity 12 - Vodafone Fixed and Current Asset Turnover ratios

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Activity 12 - Vodafone Fixed and Current Asset Turnover ratios
We can work on these ratios together now, for practice purposes. Go to the database and find the data for Vodafone that you need to calculate the fixed and current asset turnover ratios. Calculate the ratios and discuss what you have found: include your views on the strength of the ratios and indicate the additional information you need to resolve any problems you might find. Once you have carried out the basic ratio analysis, look back at the discussion on the total asset turnover ratio when we isolated the intangible assets for Vodafone and incorporate the intangible assets value in your analysis. Did you get this? Good news! Vodafone has an improved fixed asset turnover ratio: an increase of 50% over the previous year. We can see that this improvement is due to the turnover having increased at a faster rate than the increase in fixed assets. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Fixed Asset Turnover: Advanced 2

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Fixed Asset Turnover: Advanced 2
However, we do know that Vodafone has an intangible assets issue in the same way that the Carphone Warehouse has, so we need to adjust for that to give us a true view of operating asset turnover. When we discussed the total asset turnover ratio we assumed that Vodafone's goodwill value was £100,000 million and adjusted the ratio for that: we can do the same with the fixed asset turnover ratio since intangible assets are part of fixed assets. Adjusted Fixed Asset Turnover Ratio for Vodafone 31 March 2002 31 March 2001 22,845 153,462 - 100,000 15,004 154,208 - 100,000 0.43 times 0.28 times

Again, the ratio has improved over the previous year, an increase of 54%. However, the values of the ratios have changed, of course, and for the latest year the ratio is 0.43 times when the unadjusted value was 0.15 times. Similarly for 2001, unadjusted it was 0.1 times and adjusted it is 0.28 times. These are not very high ratios, of course and they are a fraction of the values of the equivalent Carphone Warehouse ratios suggesting that Vodafone is nowhere near as efficient as the Carphone Warehouse. Current Asset Turnover Ratio for Vodafone 31 March 2002 31 March 2001 22,845 2.42 times 9,438 15,004 0.83 times 18,182

Vodafone has clearly made some effort to resolve a weak current asset turnover ratio, increasing it threefold over the two years we are looking at. This is good news, of course, and we will look into the stock and debtors part of the current asset turnover ratio in a following section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Capital Employed Turnover

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Capital Employed Turnover
We know that the ROCE (return on capital employed) ratio gives us a good idea of how the profit the business is earning relates to the capital the shareholders have invested in their business. Here is another ratio that's not exactly the same as the ROCE ratio, but it does enhance our view of a business. The capital employed turnover ratio tells us the state of the relationship between the shareholders' investment in the business and the turnover that the management of the business have been able to generate from it. Capital Employed Turnover = Turnover Equity Shareholders' Funds

As with all financial ratios, there is no ideal value to this ratio, so we should find out what the Carphone Warehouse has done over the latest two years and then try to interpret what we find. Carphone Warehouse 31 March 2001 25 March 2000 £'000 Turnover Equity shareholders' funds 1,110,678 436,758 £'000 697,720 44,190

Capital Employed Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 2.54 times 436,758 697,720 44,190 15.79 times

The Carphone Warehouse has gone from a capital employed turnover ratio of almost 16 to one of 2.54 in a year - a major change that suggests a problem. We need to understand why they have this problem. The answer to our question is simple once we review the Equity Shareholders' Funds section of the balance sheet for the two years: Capital and reserves Called-up share capital Share premium 2001 833 356,235 2000 600 0

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Financial Ratio Analysis - Capital Employed Turnover

Other reserves Profit and loss account

0

0

79,690 43,590

Equity shareholders' funds 436,758 44,190 There are two changes of importance: The profit and loss account has increased by 83%, which is a good thing. We now have a share premium account, a massive share premium account: they have issued some shares at an enormous premium and it is this value that has distorted the capital employed turnover ratio. If we remove the share premium value from the ratio, we can see whether the underlying trend is good or bad: Adjusted Capital Employed Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 436,758 - 356,235 697,720 44,190 13.79 times 15.79 times

See the difference the share premium account has made? The Carphone Warehouse has lost a bit of ground in this ratio over the two years, but not as serious as we thought before. The ground it has lost, though, to fall from 15.79 to 13.79 is explained by turnover rising at a slower rate than the capital employed. As we have said before, we would expect this ratio to catch up over the coming year otherwise the investments it is making are not as valuable as they ought to be. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 13 - Vodafone Capital Employed Turnover

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Activity 13 - Capital Employed Turnover
Let's repeat these calculations now by working on Vodafone's capital employed turnover ratio. Gather the data you need, calculate the ratios and make any comments you think are worthwhile. Did you get this? The analysis Vodafone's ratios continue to say, "There is a problem." Here's another case of a very dynamic business returning a very poor result. We have the situation here where £1 worth of investment by shareholders is returning as little as £0.10 by way of turnover. Turnover has grown 52% over the two years but capital employed has fallen by 10%. This situation helps to explain why Vodafone's capital employed turnover is so poor. What is the underlying reason for such a poor ratio, though? We have already seen that around 80% of Vodafone's Net Assets are in the form of intangible assets. Whilst intangible assets are not especially productive assets of themselves, we ought to be able to expect that the source of the intangibles would be generating a more significant level of sales than we can see here. Vodafone clearly has a problem. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Working Capital Turnover

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Working Capital Turnover
The final ratio in this section is the working capital turnover ratio - the relationship between turnover and working capital. The working capital turnover ratio is straightforward and here it is! Working Capital Turnover = Sales Working Capital

What this ratio tries to highlight is how effectively working capital is being used in terms of the turnover it can help to generate: no ideal values here but the higher the better, surely. Working with the Carphone Warehouse, we have: Carphone Warehouse 31 March 2001 25 March 2000 £'000 Turnover Net current assets (liabilities) 1,110,678 93,180 £'000 697,720 -2,660

Working Capital Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 52,437 830,126 ÷ 365 51,842 505,738 ÷ 365 11.92 times -262.30 times

Oops, then much better! In 2000, the result of the working capital turnover ratio was strange because year-end working capital (net current liabilities in this case) was negative - it's difficult to interpret such a ratio. In 2001, though, it had turned this situation round and returned a value of 11.92 times. The best way to understand what this ratio means is to calculate it a few times. Let's start with Vodafone and take it from there. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 14 - Vodafone Working Capital Turnover

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Activity 14 - Vodafone Working Capital Turnover
Gather the data you need, calculate the ratios and make any comments you think are worthwhile. Did you get this? In line with many of its ratios, Vodafone has a problem with its working capital turnover ratio, too. Not only is the value for 2002 negative, but also the positive value for 2001 is very small, especially when compared with the Carphone Warehouse's 2001 value. Here we see another worrying aspect of Vodafone's performance. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Working Capital Management II

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Working Capital Management II
What we are about to study - stock, debtors and creditors control - are all part of working capital management in the same way that a discussion of liquidity was part of working capital management. We know that working capital is concerned with the ability of a business to be able to pay its way. The three ratios we are concerned with now are concerned with spending and saving money in the right places. Too much stock and we waste money on buying it and keeping it. Too much money loaned to our debtors and it's money we can't use for something else, such as buying machinery, paying our creditors or even investing it. Too much money in the form of creditors and we might have a problem that no one else will give us credit for anything else because they think we can't afford it, and, if we suddenly have a cash problem, we might not be able to pay our creditors. Working capital management is concerned with the control aspects of the issues we have just mentioned. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Stock Turnover: stock control

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Stock Turnover: stock control
In principle, the lower the investment in stocks the better. Apart from buffer stocks that businesses sometimes need in case of shortages of supply and strategic stocks in case of war, sudden changes in demand and so on, modern stock control theory tells us to minimise our investment in stocks. Let's see how the Carphone Warehouse behaves in this respect. The formula for this ratio is: Stock Turnover = Average Stocks (Cost of Sales/365)

Carphone Warehouse Consolidated Profit and Loss Account

31 March 2001 25 March 2000

£'000 Cost of sales Stock 830,126 52,437

£'000 505,738 51,842

Stock Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 52,437 830,126 / 365 51,842 505,738 / 365 23.06 days 37.42 days

If you use alternative formulae and are happy with them, that's fine. If you think you need help because of that, see your teacher/lecturer for guidance. q Firstly, the result of this calculation is that the answer is instantly in terms of the number of days, on average, that the stocks are held in the business. q Secondly, we use the cost of sales figure because stocks are bought and shown in the profit and loss account and the balance sheet at cost; so we need to compare like with like. q Thirdly, we only have two years' worth of stock information, so we can't use the average stock for both years as we should do
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Financial Ratio Analysis - Stock Turnover: stock control

according to the formula. Never mind, even though the answer won't be 100% spot on, it will give us a very good estimate of how stock control is going. How can we interpret this ratio? With a result of 23.06 days, we can imagine that we bought our £52,437,000 worth stocks of raw materials or whatever they were on 1st January 2002. We then know that we ran out of those raw materials on 1 + 23.06 days = just into 25th January. Similarly with the result of 37.42 days, if we bought our £51,738,000 worth of raw materials on 1st January, we would run out and have to buy some more on 7th February. This ratio has fallen from 37 days to 23 days over the two years and that is probably a good thing. If there's less stock to worry about, lower investment in stocks meaning that the money they used to have tied up in the stock room is now free to spend somewhere else. In fact, stocks have remained at around £52 million as we mentioned before, but the cost of sales has increased by 64% over the two years. Put these two facts together and that explains the improvement in this ratio. Well done the Carphone Warehouse! Remember that we talked about the liquidity of stocks when we discussed the acid test ratio. Now we can see that the Carphone Warehouse's stocks are fairly liquid, since a turnover ratio of 23 days isn't too bad! Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 15 - Vodafone Stock Turnover

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Activity 15 - Vodafone Stock Turnover
Repeat the stock turnover ratio calculations for Vodafone. Go to the database and find the information you need then calculate and comment on what you have found. Did you get this? Good results: Vodafone's stock turnover ratio is much less than the Carphone Warehouse and in general that it is a good thing. In addition, the ratio is fairly stable, in that it has only changed by about 5% over the two years. Well done, Vodafone! Take the opportunity now to go to the database and select another business to work on. Calculate the ratios you have just seen in this section and see what you think about that business's results. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Debtors' Turnover

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Debtors' Turnover
In the same way that stock control is a vital aspect of working capital management, so too is debtors' control. Many businesses need to sell their goods on credit, otherwise they might find it difficult to survive if their competitors provide such credit facilities; this could mean losing customers to the opposition. Nevertheless, since we do provide credit, we must do so as optimally as possible. We've used the word 'optimal' before and let me confirm that it doesn't necessarily mean the best possible, but the best possible under the circumstances. Why is credit control so important? For the Carphone Warehouse, the total amount owing by debtors was £149 million at the end of 31 March 2001, which as a percentage of total assets, is 14.09%. That's a lot of money in absolute terms and relatively, and it's 80% more than it was the year before. So, they've given an additional £69 million worth of credit to their customers over the year. What we need to know, though, is whether they are controlling these debtors. We can do that by looking at their debtors' turnover ratios for the two years, firstly. Carphone Warehouse 31 Mar 2001 25 Mar 2000 £000 Turnover Debtors due within one year The formula for debtors' turnover is: Debtors' Turnover = Average Debtors Credit Sales/365 1,110,678 149,200 £000 697,720 82,826

We have to assume, by the way, that all sales are credit sales unless we know which sales are for cash. The calculations: Debtors Turnover Ratio for the Carphone Warehouse 31 March 2002 149,200 1,110,678 ÷ 365 49.03 days

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Financial Ratio Analysis - Debtors' Turnover

25 March 2001

82,826 697,720 ÷ 365

43.33 days

Well, what do you think of that? Firstly, the ratio seems to have worsened by going from 43 to 49 days over the two years; and it means that, on average, the Carphone Warehouse's debtors are taking one and a half months to pay their accounts. Does this sound as if it's a good policy? How do we know? One of the ways we can tell, in fact, whether this ratio is good or not is to go to a Carphone Warehouse shop or go to their Web site and find out their terms of business. If we sign up with them, will they give us around 49 days to pay our bills? At the time of writing, the page http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile shows that there are a number of ways we can choose to get a phone from the Carphone Warehouse: q Pay monthly q Handset only q Pay for calls ... no line rental q Pay as you go Try and work out how it's possible to have a debtors' turnover figure of 49 days from these deals ... it's not! So what's the problem? Well, do they have corporate customers who are allowed to pay after, say, 55 days or 60 days? Do some research and find the answer if you can. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Debtors' Turnover Ratio: Advanced

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Debtors' Turnover Ratio: Advanced
However, this table from the Carphone Warehouse's annual report can help us with our research. 2001 Debtors falling due within one year: Trade debtors Other debtors Prepayments and accrued income Amounts falling due after more than one year: Amounts owed by Group undertakings Total Debtors £'000 2000 £'000

104,827 55,557 27,516 20,419 16,857 6,850

149,200 82,826

Do what the financial analyst would do: rework the debtors' turnover ratio and find the length of time that TRADE debtors take to pay their accounts ... is it more in line with what we found on the Web site? ... http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile Put the data into the same format as before: Carphone Warehouse 31 Mar 2001 25 Mar 2000 £000 Turnover TRADE Debtors due within one year 1,110,678 104,827 £000 697,720 55,557

TRADE Debtors Turnover Ratio for the Carphone Warehouse 31 March 2002 25 March 2001 104,827 1,110,678 ÷ 365 55,557 82,826 ÷ 365 34.45 days 29.06 days

There now, a bit nearer to what we are expecting aren't they? Why not EXACTLY 30 days, though, since anyone who has credit seems to have to pay at the end of a month ... find out and explain the answer to this question.

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Financial Ratio Analysis - Debtors' Turnover Ratio: Advanced

See if you can find out what OTHER debtors might be; and say why we have ignored it for the purposes of these new calculations. The final stage in this part of our analysis: if we had good enough segmental information, we might be able to find even more information that would give us the exact ratio values we were looking for. What we are really trying to do is to match sales with debtors: only when we do that and have credit and cash turnover data, will we have the true value for the debtors' turnover ratio. Since we don't have precise information, our values for the debtors' turnover ratio are estimates. Nevertheless, we have seen already that we can check some aspects of the results we get by, for example, going to a Carphone Warehouse shop and investigating payment terms. Here is the Carphone Warehouse's segmental turnover information ... but it's still not enough for us to be able to match turnover with trade debtors. Turnover Turnover Divisional results are analysed as follows Distribution Telecoms Services Wireless Data Services Total Turnover £'000 1,079,143 30,481 1,054 1,110,678 £'000 685,838 10,456 1,426 697,720

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Financial Ratio Analysis - Activity 16 - Vodafone Debtors' Turnover Ratio

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Activity 16 - Vodafone Debtors' Turnover Ratio
Let's repeat these calculations but for Vodafone. Go to the database, find the information you need and calculate the debtors' turnover ratios for them. Did you get this? Vodafone is consistent... consistently terrible when compared with the Carphone Warehouse. Can it really be true that a mobile telecommunications business waits three months for its debtors to pay their accounts? After all, the demand for mobile phones is such that Vodafone can insist on its payment terms can't they? Here's some additional information taken from Vodafone's annual report that will help us to sort this mess out! 2002 2001 Debtors due within one year: Trade debtors ... Total Debtors £m £m

3,389 1,852 ... ...

6,095 3,701

Do what the financial analyst did for the Carphone Warehouse and rework the debtors' turnover ratio and find the length of time that trade debtors take to pay their accounts ... is it more sensible and realistic than three months? Put the data into the same format as before: Vodafone 31 Mar 2002 31 Mar 2001 £m Turnover TRADE Debtors due within one year 22,845 3,389 £m 15,004 1,852

Debtors Turnover Ratio for Vodafone

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Financial Ratio Analysis - Activity 16 - Vodafone Debtors' Turnover Ratio

31 March 2002 3,389 54.15 days 22,845 ÷ 365 31 March 2001 1,852 45.05 days 15,004 ÷ 365 A lot better and much nearer to what we should expect and ... still a lot longer than the Carphone Warehouse. Try to find out what is it about Vodafone that makes their Trade debtors payment terms so generous when compared with the Carphone Warehouse. Remember that we talked about the liquidity of debtors when we discussed the acid test ratio. Now we can see that the Carphone Warehouse's debtors are not that liquid. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Creditors' Turnover Ratio

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Creditors' Turnover Ratio
Creditors are the businesses or people who provide goods and services in credit terms. That is, they allow us time to pay rather than paying in cash. There are good reasons why we allow people to pay on credit even though literally it doesn't make sense! If we allow people time to pay their bills, they are more likely to buy from your business than from another business that doesn't give credit. The length of credit period allowed is also a factor that can help a potential customer decide whether to buy from your business or not: the longer the better, of course. In spite of what we have just said, creditors will need to optimise their credit control policies in exactly the same way that we did when we were assessing our debtors' turnover ratio - after all, if you are my debtor I am your creditor! We give credit but we need to control how much we give, how often and for how long. Let's do some calculations for the Carphone Warehouse. The formula for this ratio is: Creditors' Turnover = Average Creditors (Cost of Sales/365)

As with the stock turnover ratio, creditor values relate to the costs of raw materials, goods and services, which is why we use the cost of sales figure in the denominator (Remember the numerator? Well, this is the opposite. The denominator is the bottom part of a fraction!) Carphone Warehouse 31 March 2001 25 March 2000 £'000 Cost of sales Creditors: Amounts falling due within one year 830,126 222,348 £'000 505,738 173,820

Creditors Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 222,348 830,126 ÷ 365 173,820 505,738 ÷ 365 97.76 days 125.45 days

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Financial Ratio Analysis - Creditors' Turnover Ratio

We interpret this ratio in exactly the same way as the debtors' turnover ratio. That is, in 2001 if we had bought some supplies for £222,348 on 1st January, we would have paid for them 97.76 days later on 6th April. You can work out the payment date for 2000 if we imagine buying some supplies for £173,820 on 1st January of that year. Having found that debtors are taking somewhere between 30 and 50 days to pay their accounts, notice that the business is taking over three months credit for itself in 2001 and about four months' credit in 2000. These results are worrying: especially when we know that small businesses in the UK are suffering because large businesses take too long to pay their accounts; and if the Carphone Warehouse has many small suppliers that is worrying. You can now attempt an additional question. Additional notes are available on advanced stock, creditors and debtors or you can move on to the Gearing section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Additional question 15

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Additional question 15
You should now be able to complete the four parts of the below question. Find Sage plc (the accounting software developer) in the database and gather the data you need to calculate and comment on the following ratios: . Total Asset Turnover b. Stock Turnover c. Debtors' Turnover d. Creditors' Turnover Did you get this? Additional notes are available on advanced stock, creditors and debtors or you can move on to the Gearing section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Creditors' Turnover: Advanced 1

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Creditors' Turnover: Advanced 1
The Carphone Warehouse has a supplier payment policy, as stated in its annual report: Supplier payment policy The Group's policy is to agree terms of transactions, including payment terms, with suppliers and, provided suppliers perform in accordance with the agreed terms, it is the Group's normal practice that payment is made accordingly. The number of days outstanding between receipt of invoices and date of payment calculated by reference to the amount owed to trade creditors at the period end as a proportion of the amounts invoiced by suppliers during the period, was 53 days (2000 - 45 days). Source: Carphone Warehouse Annual Report - page 22 [PDF] This supplier payment policy tells us that the creditors' turnover ratio was 53 days in 2001 and 45 days in 2000. Can we prove that this is true from the information we have? Well, a note to the accounts in the annual report also shows us the breakdown of the creditors' values 2001 Creditors: amounts falling due within one year Obligations under finance leases and hire purchase contracts Loans and overdrafts Trade creditors Corporation tax Other taxes and social security costs Other creditors Accruals and deferred income £'000 256 10,537 144,908 8,102 15,933 11,685 30,927 2000 £'000 125 28,131 75,948 9,577 6,772 19,959 33,308

222,348 173,820 Let's rework the creditors' turnover ratio now on the basis of trade creditors and see what we find, fill in the blanks: Trade Creditors Turnover Ratio for the Carphone Warehouse 31 March 2001 ______________ _____days

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Financial Ratio Analysis - Creditors' Turnover: Advanced 1

25 March 2000

______________ _____ days

Trade Creditors Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 144,908 830,126 ÷ 365 75,948 505,738 ÷ 365 63.71days 54.81 days

These figures are clearly a lot less than our original estimates of the creditors' turnover figures but still not in agreement with the figures that the Carphone Warehouse have given us. Who is right, us or the Carphone Warehouse? Seriously, our figures are arithmetically correct but we are missing something ... what is it that we are missing? We are missing enough detailed information to allow us to agree with the 53 and 45 days we have been given. What we have is the end of year creditors' balances: what the Carphone Warehouse has is the exact amounts invoiced by suppliers during the period ... we only have the cost of sales information and that's not the same, is it? Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Creditors' Turnover: Advanced 2

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Creditors' Turnover: Advanced 2
For fun, we could work backwards (we could call it reverse engineering!) to find the amounts invoiced by supplies based on the 53 days we are given by the business couldn't we? This will help us to reconcile the value of 53 days that we see in the annual report and accounts. Go on, then, have a go! OK, here's the first bit of the first one to start you off: 53 days = Creditors = 144,908 = Cost of sales X2001 365 365 Finish it off now! Did you get this? ... how do you interpret this result? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 17 : Vodafone creditors' turnover ratio

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Activity 17 : Vodafone creditors' turnover ratio
Go to the database of businesses, find the relevant information and calculate the creditors' turnover ratios as far as you can. Beware, you may be surprised at your answers! Now contrast your calculations with the following extract from Vodafone's annual report: Creditor payment terms It is the Group's policy to agree terms of transactions, including payment terms, with suppliers and, provided suppliers perform in accordance with the agreed terms, it is the Group's normal practice that payment is made accordingly. The number of days outstanding between receipt of invoices and date of payment, calculated by reference to the amount owed to trade creditors at the year end as a proportion of the amounts invoiced by suppliers during the year, was 36 days in aggregate for the Group. Did you get this? Don't say we didn't warn you: these are astonishing results, aren't they? A year to pay their creditors in 2002 and a year and eight months to pay in 2001? Can't be right can they? Well, arithmetically we have done nothing wrong ... what's the problem, then, as surely Vodafone can't be abusing its creditors' privileges so badly can they? You can now attempt Additional question 16 or move on to the Next Section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 16

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Additional question 16
Compare the results in answer to question 15 and repeat those calculations for: q One Saturday q The Hilton Group q Paddy Power plc q Fox Kids Europe Present your ratios and discussion in the most appropriate way. Did you get this? Go to Additional question 17 Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 17

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Additional question 17
Paddy Power plc is a service business that provides sports betting services a chain of licensed betting offices principally in Ireland together with telephone and on-line interactive betting. You are required to undertake a full review of Paddy Power's q profitability q rates of return q liquidity q asset usage Consequently, you need to go to the database and obtain all of the information you need to evaluate the ratios under each of the above headings. You should find the following additional information useful: include as much of this information as possible in your analysis of the business. NOTE: all of Paddy Power's data are in Euro. Paddy Power plc Five Year Review (Euro '000) Turnover Operating profit Profit on ordinary activities before taxation Profit on ordinary activities after taxation Net assets Did you get this? Go to Additional question 18 Section Index | Previous | Next | Next Section | Section Map 2001 2000 1999 1998 1997

461,075 362,825 269,640 193,501 154,915 8,507 9,092 10,629 10,950 7,037 7,065 5,566 5,585 4,477 4,521

7,329

8,013

4,958

3,577

2,721

30,733

26,088

16,207

14,122

10,678

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Financial Ratio Analysis - Additional question 17

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Financial Ratio Analysis - Additional question 18

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Additional question 18
Jarvis Porter Group plc provides printing and manufacturing of labels, packaging and promotional products. You are required to undertake a full review of Jarvis Porter Group's q profitability q rates of return q liquidity q asset usage Consequently, you need to go to the database and obtain all of the information you need to evaluate the ratios under each of the above headings. You should find the following additional information useful: include as much of this as possible in your analysis of the business. Jarvis Porter Group plc Five Year record Turnover (£m) Profit/(loss) before tax (£m) Shareholders' funds ( m) Earnings/(loss) per share (pence) Adjusted earnings/(loss) per share (pence) Equity dividends (pence) 1997 1998 1999 2000 2001

95.40 101.20 106.40 108.80 60.10 12.40 28.00 14.60 17.70 7.35 14.00 26.30 20.00 20.00 7.80 1,215 5.00 23.50 -0.20 -4.30 26.70 23.10

-5.40 -54.90 -7.70 5.30 3.75 1,392 -3.40 -7.70 70.00 1,344 0.00 760

Average number of employees 1,066 Did you get this? Go to Next Section

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Financial Ratio Analysis - Gearing 1

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Gearing 1
Gearing = Long Term Liabilities Equity Shareholders' Funds

Gearing is concerned with the relationship between the long terms liabilities that a business has and its capital employed. The idea is that this relationship ought to be in balance, with the shareholders' funds being significantly larger than the long term liabilities. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Gearing 1

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Gearing 1
Shareholders ought to have the upper hand because if they don't that could cause them problems as follows: q Shares earn dividends but in poor years dividends may be zero: that is, businesses don't always need to pay any! q Long term liabilities are usually in the form of loans and they have to be paid interest; even in bad years the interest has to be paid q Equity shareholders have the voting rights at general meetings and can made significant decisions q Long term liability holders don't have any voting rights at general meetings but they have the power to override the wishes of the shareholders if there are severe problems over their interest or capital repayments So, shareholders like to see the gearing ratio, the relationship between long term liabilities and capital employed, being in their favour! Let's look at the Carphone Warehouse's gearing ratio. The formula: Gearing = Long Term Liabilities Equity Shareholders' Funds

The data: Carphone Warehouse 31 March 2001 25 March 2000 £'000 Creditors: Amounts falling due after more than one year Equity shareholders' funds 14,107 436,758 £'000 21,033 44,190

Gearing Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 14,107: 436,758 21,033: 44,190 0.032: 1 0.476: 1

A shareholder of the Carphone Warehouse will be happy with these results. Even in 2000 when the ratio was relatively high at 0.476 or 47.6% they probably were not too worried because their other ratios were

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Financial Ratio Analysis - Gearing 1

fine too. In 2001 the gearing ratio fell to almost zero indicating that the business much prefers equity funding to debt funding. This minimises the interest payment problems and the control problems of having a dangerously high level of long-term debt on the balance sheet. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 18 : Vodafone gearing

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Activity 18 : Vodafone gearing
Gather the gearing data from the database, calculate the gearing ratio and analyse your findings for Vodafone. Did you get this? You can now try an additional question. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question

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Additional question
Analyse the gearing ratio of any business whose details are listed in the database: that is, calculate the ratio and comment on what you find. Did you get this? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Gearing 2

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Gearing 2
There is an alternative gearing ratio, we can call it the Gearing Ratio II. The formula for this ratio is: Gearing 2 = Long Term Liabilities Long Term Liabilities + Equity Shareholders' Funds

Let's just get on with this one. Gather the necessary data from both of our businesses, Carphone Warehouse and Vodafone and calculate this ratio for them. The calculations: Gearing II Ratio for the Carphone Warehouse 31 March 2001 14,107: 436,758 + 14,107 0.031: 1 25 March 2000 21,033: 44,190 + 21,033 0.322: 1

Gearing II Ratio for Vodafone 31 March 2002 13,118: 130,573 + 13,118 0.091: 1 31 March 2001 11,235: 145,007 + 11,235 0.072: 1 In the case of both the Carphone Warehouse and Vodafone, these ratios are, as we should expect, smaller than Gearing 1 and they are still, therefore, insignificant by the end of the two years we are analysing here. You can now try these additional questions. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Additional question 20

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Additional question 20
Using whichever newspaper or Web site you wish, carry out an analysis of any business in the database from the point of view of an investor. You should include at least the following ratios in your analysis: q earnings per share q dividends per share q dividend yield q dividend cover q P/E ratio Did you get this? Now try additional question 21. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 21

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Additional question 21
. Go to the database and for any company you choose, calculate the following ratios for one year's financial statements. b. As an outside analyst, state the questions you would want to ask management based on the ratios you have calculated. r Return on Total Assets r Return on Equity r Gross Profit Margin r Net Profit Margin r Asset Turnover r Stock Turnover Ratio (Days) r Debtors Turnover Ratio (Days) r Current Ratio r Acid Test Ratio r Times Interest Earned Ratio r Gearing Ratio Did you get this? Now try additional question 22. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 22

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Additional question 22
From the database, find an industry that has at least three businesses in it and compare the results under the headings given below for each business. State the conclusions you would draw from your findings: q Profitability q Rate of Return q Liquidity q Asset Usage q Asset Usage q Gearing q Investor Did you get this? Now try additional question 23. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 23

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Additional question 23
ADVANCED From the database, find an industry that has at least three businesses in it and compare the following results for each business and state the conclusions you draw from your findings. Profitability Gross profit margin Net profit margin Profit before interest and taxation % Profit before taxation % Profit for the year % Operating costs % Rate of Return Return on Capital Employed Return on Total Assets Return on Fixed Assets Return on Working Capital You should include statistical and graphical analysis in your solution. Did you get this? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Investor ratios

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Investor ratios
Basic equations you'll need: Earnings per share = Profit available to equity shareholders Average number of issued equity shares Dividends paid to equity shareholders Average number of issued equity shares

Dividends per share =

Dividend yield =

Latest annual dividends Current market share price Net profit available to equity shareholders Dividends paid to equity shareholders Current market share price Earnings per share

Dividend cover =

Price/earnings or p/e ratio =

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Financial Ratio Analysis - Investor ratios

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Investor ratios
Most of the investor ratios that we might need to use are relatively simple both to use and to understand. We can contrast these ratios with others, such as stock and debtors' turnover; and the relationships between the ROCE and the profit margin and assets turnover ratios, at the top of the pyramid of ratios. That's good news, then! The basic five ratios we are interested in are: q Earnings per share q Dividends per share q Dividend yield q Dividend cover q P/E ratio As before, we'll take each ratio in turn and use the Carphone Warehouse and Vodafone accounts to apply them. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Earnings per share

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Earnings per share: EPS
This is, perhaps, the fundamental investor ratio: in this case, we work out the average amount of profits earned per ordinary share issued. The formula is: Earnings per share = Profit available to equity shareholders Average number of issued equity shares

Here are the extracts from the accounts that we need and they are followed by the results for one of the two years, you should calculate the EPS for the other year. The Carphone Warehouse Consolidated Profit and Loss Account Profit for the financial period (£) Weighted average number of issued shares 31 March 2001 25 March 2000

38,159,000 833,000,000

16,327,000 600,000,000

31 March 2001

25 March 2000

EPS 38,159,000 £0.04648 _____________ 833,000,000 Did you get this? The good news for investors here is that the average earnings per issued ordinary share has almost doubled over the two years. Notice that the number of shares issued has increased from 600 million to 833 million, so this really is a good result as profits available for shareholders must have increased significantly too from £16,327,000 to £38,159,000. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 19 : Vodafone EPS

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Activity 19 : Vodafone EPS
Go to the database and find the data you need to calculate the EPS for Vodafone and then calculate it for the two years for which you have data. Here are two templates to help you along: aren't we kind? Vodafone 31 Mar 2002 31 Mar 2001 Consolidated Profit and Loss Account Profit for the financial period (£) Weighted average number of issued shares

31 Mar 2002

31 Mar 2001

EPS __________ £ ______ __________ £ ______

Did you get this? Big numbers for the profit and the shares but in the end, as we should expect by now, the EPS for Vodafone is a disaster - negative and relatively large. For every share, ordinary shareholders have lost 25 pence in 2002 and they lost 16 pence in 2001. The Carphone Warehouse's shareholders have made gains on average per share. Advanced: Special note on the EPS Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Dividends per Share: DPS

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Dividends per Share: DPS
The DPS ratio is very similar to the EPS: EPS shows what shareholders earned by way of profit for a period whereas DPS shows how much the shareholders were actually paid by way of dividends. The DPS formula is: Dividends per share = Dividends paid to equity shareholders Average number of issued equity shares

Oops, there are no dividend data for the Carphone Warehouse, on page 13 of their annual report and accounts they say: Profit for the period attributable to shareholders was £38.2m resulting in total shareholders' funds of £436.8m at the period end. As in previous periods the Board has decided to retain these earnings for continued investment in the development of the Group and the future enhancement of shareholder value and is not therefore proposing a dividend for the period. Vodafone has paid dividends in recent years so gather the relevant data from the database and calculate the DPS for it. Here are the templates we so kindly began to provide under the EPS heading! Here are two templates to help you along: aren't we kind? Vodafone 31 Mar 2002 31 Mar 2001 Consolidated Profit and Loss Account Equity dividends (£) Weighted average number of issued shares

31 Mar 2002

31 Mar 2001

DPS __________ £ ______ __________ £ ______

Did you get this? Vodafone themselves report the DPS as Dividend per share 1.4721p in 2002 and 1.4020p in 2001 In conclusion we can see that even though Vodafone is suffering large

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Financial Ratio Analysis - Dividends per Share: DPS

losses, it is still paying dividends to its shareholders, yet the Carphone Warehouse, which is apparently in a better position is not paying dividends. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 20 - DPS

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Activity 20 - DPS
Get copies of and read their respective annual reports and accounts and try to find out why these companies have adopted the dividend strategies they have. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Dividend Yield

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Dividend Yield
The dividend yield ratio allows investors to compare the latest dividend they received with the current market value of the share as an indictor of the return they are earning on their shares. Note, though, that the current market share price may bear little resemblance to the price that an investor paid for their shares. Take a look at the history of a business's share price over the last year or two and you will see that today's share price might be a lot higher or a lot lower than it was a year ago, two years ago and so on. We clearly need the latest share price for this ratio and we can get that from newspapers such as the Financial Times, The Times, The Guardian and the Daily Telegraph. We can also find the share prices on the Internet. The formula for the dividend yield is: Dividend yield = Latest annual dividends Current market share price

It is common for newspapers and others to calculate the dividend yield automatically as part of their offerings. Take a look at the extract from The Times and you'll find the dividend yield figure in the second right hand column, before the P/E ratio. Here's an extract from The Times newspaper's share page (Source: The Times Newspaper 18 September 2002) together with a few links to some Web sites where we can find share prices. Use them now or later. 12 month 12 month High Low Company Price Yld (p) +/- % P/E

TELECOMMUNICATIONS 295½ 395¾ 337½ 96 665 82 195 181¾ 131½ 65 34½ 278 1 79¾ BT Group 193 -4½ 1.0 -4½ 3.6 -1½ ... -½ -5 ... ... ... ... 48.4 ... ... ... ... ... 17.9

Cable Wireless 138 Easynet mmO2 Orange TeleWest Vodafone Gp 71 43¼ 340 1¼ 90½

-1½ 1.6

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Financial Ratio Analysis - Dividend Yield

Source: The Times Newspaper 18 September 2002. Web Sites Here is a selection of Web sites that will find the latest share prices for us: you either need to know the code for the share you are interested in, eg CPW for the Carphone Warehouse and VOD for Vodafone; or you will probably be given the opportunity to search for the code. q Bloomberg Market Monitor http://www.bloomberg.co.uk/
q q

Yahoo UK & Ireland Finance http://uk.finance.yahoo.com/ Reuters http://www.reuters.co.uk/

Since the Carphone Warehouse hasn't paid a dividend recently, we can't calculate its dividend yield: we can, however, for Vodafone. Combine the dividend data for Vodafone and combine it with the newspaper and internet extracts above to determine the dividend yield ... remember, the yield is the yield as at today, or the time of the latest available share price. Did you get this? A yield of 1.63% is not that high but there are shareholders who only paid 79.75 pence per share for their investment so their dividend yield is 1.85%; but others have paid as much as 195 pence per share for their shares, so their dividend yield is only 0.75%. We have taken these two prices from the Times newspaper from the last year's highest and lowest prices. Take a look at the dividend yields of other businesses and see how well Vodafone is doing compared to the average... any company you like, in fact. Here are a few examples. Food Retailers Budgens Dairy Farm International Morrison Safeway Sainsbury Tesco Thorntons Average Source: The Times 18 September 2002. Breweries, Pubs and Restaurants Burtonwood Brewery Greene King Dividend Yield (%) 3.7 3.5 Dividend Yield (%) 2.0 1.1 1.1 4.4 4.6 2.9 5.8 3.13

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Financial Ratio Analysis - Dividend Yield

Pizza Express Scottish and Newcastle JD Wetherspoon Average Source: The Times 18 September 2002.

3.5 5.1 1.0 3.36

At the time of writing, dividend yields seem to be rather low. The above examples are representative of the overall market. Still, why would shareholders accept such low yields? The answer is probably that shareholders are more concerned with capital gains, i.e. increases in the share price, rather than the dividend they might receive. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 21 : Vodafone Dividend Yield

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Activity 21 : Vodafone Dividend Yield
1. Take the latest prices for Vodafone's shares from either Yahoo or Reuters and rework the dividend yield value for Vodafone. 2. Get the latest share price from a newspaper or a Web site and rework the dividend yield for Vodafone 3. Choose another business from the database and evaluate its dividend yield, taking your current market share price from any source you wish. Did you get this for question 1? For question 2, check your figures carefully and feel free to use this template: Vodafone dividend yield pence Yield Latest annual dividend Current market share price For question 3, here is the dividend yield for Tesco. Tesco dividend yield Latest annual dividend pence Yield 5.6 2.74% ____%

Current market share price 204.5 Sources: Annual report and accounts financial year ended 23 February 2002 and The Times 18 September 2002. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Dividend Cover

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Dividend Cover
The dividend cover ratio tells us how easily a business can pay its dividend from profits. A high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend. Here's the formula followed by an example. Dividend cover = Net profit available to equity shareholders Dividends paid to equity shareholders

Since the Carphone Warehouse hasn't paid a dividend, let's turn to Vodafone immediately. In the database find the data you need to calculate the dividend coverage for the two years for which we have data for Vodafone and calculate the dividend cover ratio for those two years. Here's a template for you to fill in with the data you find. Vodafone 31 Mar 2002 31 Mar 2001 Consolidated profit and loss account £m Profit for the financial period Dividends £m

Vodafone dividend cover Profit for the financial period Dividends Did you get this?

31 Mar 2002

31 Mar 2001

In this case, we see a terrible situation, as usual, for Vodafone. The profit for the period is in fact negative, so these results are dreadful - even though the values are positive, that is only because of the mathematics ... Vodafone has no dividend cover at all for these two years. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 22 : Dividend Cover

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Activity 22 : Dividend Cover
Go to the database and find the relevant data to enable you to calculate and comment on the dividend cover ratio for any business in the database that has paid dividends. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Price Earnings Ratio

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Price Earnings Ratio: P/E ratio
The P/E ratio is a vital ratio for investors. Basically, it gives us an indication of the confidence that investors have in the future prosperity of the business. A P/E ratio of 1 shows very little confidence in that business whereas a P/E ratio of 20 expresses a great deal of optimism about the future of a business. Here's the formula, then we'll work through an example Price/earnings or p/e ratio = Current market share price Earnings per share

Here are the P/E ratios of five businesses in the Telecommunications sector: Telecommunications P/E ratio BT Project Telecom Telecom Plus Vanco Vodafone Average 48.4 12.0 19.7 78.4 17.9 35.28

Source: The Times Newspaper 18 September 2002 See how big some of these P/E ratios are - that's not necessarily a good thing! Let's look at the calculations and then we can interpret our findings. Again, we need current market share prices as well as the EPS values. This means we can go back to the Carphone Warehouse even though it isn't paying dividends at the moment: The Carphone Warehouse pence P/E ratio Current market share price EPS 76.0 4.6 16.52

Note: 1. the current market share price is taken from The Times newspaper 18 September 2002 and the EPS is taken from the table below

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Financial Ratio Analysis - Price Earnings Ratio

(previously calculated in the EPS section, above) 2. we have worked in pence here; but we could just as easily have worked in Pounds and the answer would have been the same, at a P/E ratio of 16.52 The Carphone Warehouse 31 March 2001 EPS 38,159,000 833,000,000 What does a P/E ratio of 16.52 mean? In raw terms it means that investors are currently paying the equivalent of 16.52 years' worth of earnings to own a share in the Carphone Warehouse. That is, they hare currently paying 76 pence per share and since the EPS is 4.6 pence per share, this means that they will recover their investment in a share after 16.52 years - equivalent to the break even and payback period if you like. 16.52 is a high value for a P/E ratio; but not the highest and essentially the higher the ratio the better. However, we would say that P/E ratios of 78.4 and 48.4 are excessive and might reflect an unreal situation. It's possible in extreme circumstances that the share price is, in fact, independent of the current market share price so that a high P/E ratio is actually based on more up to date news than last years EPS value. BT has a P/E ratio of 48.4 yet it is not too long ago that it was heading for potential liquidation as its victory in securing its third generation licences had led to its taking on a massive debt burden that it could not, in reality, sustain. However, it seems now that investors like the current performance of BT and are voting for it by buying its shares at highly inflated values relative to its EPS. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help £0.046

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Financial Ratio Analysis - Activity 23 : Vodafone P/E ratio

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Activity 23 : Vodafone P/E ratio
Using the database find the relevant data for Vodafone and calculate its P/E ratio. If you have worked through the EPS section of this part of the site, you should have Vodafone's EPS ratio value already. If not, go there and work through it so that you can get your own EPS ratio for Vodafone. Note: we found a negative EPS for Vodafone so we can't use that for our P/E ratio calculations. Let's take the adjusted EPS values from Vodafone's latest annual report and accounts: Adjusted EPS: 3.54 pence per share Vodafone Current market share price EPS Did you get this? Isn't it strange that a business with a negative EPS is quoted in a newspaper, The Times, as having a P/E ratio of +17.9: surely this presents a false set of expectations for current and potential investors? Nevertheless, investors are saying that Vodafone is a good prospect for the future by marking up its P/E ratio so highly. This is despite the fact that Vodafone has had, at the time of writing, a string of very poor results and its senior executives had been battling over their bonuses! Additional notes are available on advanced investor ratios. Section Index | Previous | Next | Next Section | Section Map pence P/E ratio

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Financial Ratio Analysis - Advanced Investor ratios

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Advanced Investor ratios
The interest cover ratio is the twin brother of the dividend payout ratio and it both means the same and is calculated in the same way. Here's the interest cover ratio formula: Interest Cover = Net profit before interest Interest paid

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Financial Ratio Analysis - Interest cover

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Interest cover
The interest cover ratio tells us the safety margin that the business has in terms of being able to meet its interest obligations. That is, a high interest cover ratio means that the business is easily able to meet its interest obligations from profits. Similarly, a low value for the interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations. The Carphone Warehouse Consolidated Profit and Loss Account 31 March 2001 25 March 2000

£'000 Profit before interest and taxation Net interest receivable (payable) Here's a reminder of the formula: Interest Cover = Net profit before interest Interest paid 45,012 2,385

£'000 25,300 -196

Here's the first interest cover value calculated for you, now you work out the value for the missing one. 31 March 2001 Profit before interest and taxation Net interest receivable (payable) Did you get this? In 2001, the Carphone Warehouse had no problem with its interest obligations since it was a net receiver of interest: the interest it earned was greater than the interest it might have had to pay. For the previous year, though, its interest obligations were negative, meaning that it needed to pay more interest than it had earned. However, at 129.08, its interest cover ratio is more than satisfactory as it means that the necessary profit is 129.08 times larger than the interest payments that the business had incurred. Section Index | Previous | Next | Next Section | Section Map 45,012 18.87 2,385 25 March 2000

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Financial Ratio Analysis - Interest cover

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Financial Ratio Analysis - Activity 24 : Vodafone Interest cover

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Activity 24 : Vodafone Interest cover
Calculate the interest cover ratios for Vodafone for the two years for which the data in the database are available. Explain your findings. Here are the templates to help you on your way. Vodafone 31 Mar 2002 31 Mar 2001 Consolidated profit and loss account £m Profit before interest and taxation Net interest receivable (payable) Did you get this? These results follow on from all other poor results for Vodafone, except the P/E ratio, of course. Although the results are positive, they are terrible. Why? Well, the values are positive because both the profit and the interest are negative amounts and as any good mathematician knows, two negatives make a positive! Consequently, Vodafone's interest cover ratio tells us that its profits are insufficient to pay the interest it owes. However, these results help us to illustrate a good point: even though the interest cover ratio gives us a bad result, it doesn't mean the Vodafone can't pay the interest it owes: in fact it must have because its still in business and its creditors have yet to take it to court for recovery of its debt. You can now try these additional questions. Section Index | Previous | Next | Next Section | Section Map £m

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Financial Ratio Analysis - Additional question 24

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Additional question 24
Choose the same businesses as you did for question 23 and carry out a similar comparative analysis of those businesses based on the following: Liquidity Current ratio Acid Test (Liquid) Ratio Asset Usage Total Asset Turnover Stock Turnover Debtors' Turnover Creditors' Turnover Fixed Asset Turnover Capital Employed Turnover Gearing Debt: Equity Debt: Debt + Equity Investor Earnings per share Dividends per share Dividend yield Dividend cover Price/earnings ratio Interest cover You should include statistical and graphical analysis in your solution. Did you get this? You can now try Additional question 25. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 25

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Additional question 25
The table below contains the common size statements of eight different business, the industry/sector in which these business operate are given at the end of the table. Your job is to decide which business belongs in which industry/sector. For example, if you think that business 1 is a retail organisation then your answer will be 1 = retail organisation The following ratios also relate to these businesses and they might be helpful in helping you to arrive at your decisions: Year 1 Common Size Statements Consolidated Profit and Loss Account Turnover Cost of sales Gross profit Operating expenses Operating profit Other costs/income Profit before interest and taxation Net interest receivable (payable) Profit on ordinary activities before taxation Tax on profit on ordinary activities 100.00% -88.59% 11.41% -5.95% 5.45% -3.83% 1.63% 100.00% 100.00% -94.38% -90.36% 5.62% -0.83% 4.79% -0.73% 4.05% 9.64% -1.82% 7.81% -0.45% 7.36% 100.00% 100.00% 100.00% -72.54% -88.01% -10.45% 27.46% -16.59% 10.87% 0.00% 10.87% 11.99% 89.55% 100.00% 100.00% 0.00% -64.86% 100.00% 35.14% 1 2 3 4 5 6 7 8

0.00% -62.41% -244.32% -23.41% 11.99% 0.64% 12.63% 27.15% -144.32% -10.48% 0.00% 4.46% 0.00%

27.15% -139.86% -10.48%

0.17%

-2.44%

-2.39%

-2.49%

-1.20%

-0.76%

20.77%

-0.36%

1.80%

1.62%

4.97%

8.38%

11.44%

26.39% -119.09% -10.84%

-1.85%

-0.74%

-1.45%

0.00%

-3.36%

-8.44%

0.00%

-3.61%

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Financial Ratio Analysis - Additional question 25

Profit on ordinary activities after taxation Equity minority interests Profit for the financial period Dividends Retained profit Consolidated Balance Sheet Fixed assets Intangible Assets Tangible assets Investments Total Fixed Assets Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand

-0.05%

0.87%

3.52%

8.38%

8.08%

17.94% -119.09% -14.45%

-0.02%

-0.15%

-0.01%

0.00%

-0.06%

0.02%

0.00%

-3.19%

-0.07%

0.72%

3.52%

8.38%

8.02%

17.96% -119.09% -17.64%

-3.20% -3.27%

-2.08% -1.36%

0.00% 3.52%

0.00% 8.38%

-3.12% 4.89%

-1.19%

0.00%

0.00%

16.77% -119.09% -17.64%

0.00% 89.90% 6.95% 91.18%

2.58%

44.23%

4.81%

22.83% 118.91% 10.23% 0.00%

0.00% 21.48% 0.00% 21.48%

36.58% 21.11% 0.00% 57.68%

458.58% 121.98% 18.32% 3.41%

307.62% 101.58% 0.00% 15.88%

479.48% 169.62%

312.43% 140.29% 129.14%

10.31% 57.39%

7.31% 62.11%

1.02% 14.15%

0.00% 62.33%

13.34% 38.40%

0.55% 18.78%

0.83% 14.24%

12.82% 19.34%

0.00% 3.37% 76.75%

37.20% 3.05% 109.68%

0.00% 3.44% 18.62%

0.00% 21.44% 83.76%

0.89% 1.58% 54.21%

0.00% 14.61% 33.95%

0.00% 97.12% 112.19%

0.00% 33.05% 65.22%

Creditors: Amounts falling due within one year Net current assets (liabilities) Total assets less current liabilities

43.25% -142.28% -36.17% -128.56%

52.06% -24.24%

-21.71% -20.97%

33.50%

-32.60% -17.55%

-44.79%

2.15%

9.70%

90.48%

44.25%

124.67%

446.88% 152.07%

267.64% 142.44% 138.84%

111.96% 101.93%

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Financial Ratio Analysis - Additional question 25

Creditors: Amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called-up share capital Share premium Other reserves Profit and loss account Equity shareholders' funds Minority interests Total capital employed

16.05% -296.82% -51.00% -164.82% -25.15% -17.27%

-11.96%

-0.78%

8.63%

-50.06%

-1.07%

-2.82%

17.29% -21.58%

0.00%

-1.15%

100.00%

100.00% 100.00%

100.00% 100.00% 100.00%

100.00% 100.00%

15.65% 0.00% 18.20% 65.81% 99.66%

11.66% 33.89% 12.47% 33.20% 91.23%

6.01% 68.18% 9.16% 16.51% 99.86%

70.98% 0.00% 0.00% 29.02% 100.00%

7.64% 0.00% 0.00%

2.79% 95.20% 13.45%

6.98% 251.91% 41.54%

2.19% 95.14% -0.47% 3.14%

91.57% -11.46% -202.94% 99.21% 99.98%

100.00% 100.00%

0.34% 100.00%

8.77%

0.14%

0.00%

0.79%

0.02%

0.00%

0.00%

100.00% 100.00%

100.00% 100.00% 100.00%

100.00% 100.00%

Ratios

1

2

3

4

5

6

7

8

Return on Capital Employed -0.12% 3.16% 5.56% 33.63% 16.17% 16.29% -38.75% -7.44% Asset Turnover Stock Turnover Ratio (Days) Debtors Turnover Ratio (Days) Acid Test Ratio Gearing Ratio 1.93 24.11 118.84 1.54 0.16 0.83 7.09 56.81 -0.72 -3.25 0.93 2.61 32.73 -0.49 -0.51 1.28 0.00 56.69 -0.65 -1.65 1.43 27.65 70.06 0.79 -0.25 0.70 21.10 75.60 -1.38 -0.17 1.52 n/a 0.04 n/a

159.78 249.58 -5.13 -0.12 19.58 0.01

The industry/sector in which a business can operate must be taken from the following list: q Accounting Software Developer and Supplier q Established International Airline q Leisure and Hotels q Manufacturer q New Discount Airline q Oil Extraction and Refining q Retailer

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Financial Ratio Analysis - Additional question 25
q

Scientific Research

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Financial Ratio Analysis - Additional question 26

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Additional question 26
Ratio analysis is a powerful tool that accountants and analysts can use to understand how a business is being managed. Ratios can be grouped under a number of different headings such as q profitability q rate of return q liquidity q asset usage or activity Give a brief description of each of these headings and give examples of two ratios under each heading. Did you get this? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - What do we want ratio analysis to tell us?

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What do we want ratio analysis to tell us?
The key question in ratio analysis isn't only to get the right answer: for example, to be able to say that a business's profit is 10% of turnover. We have to start working on ratio analysis with the following question in our heads: What are we trying to find out? Isn't this just blether, won't the exam just ask me to tell them that profit is 10% of turnover? Well, yes, but then they want to know that you are a good student who understands what it means to say that profit is 10% of turnover. We can use ratio analysis to try to tell us whether the business 1. is profitable 2. has enough money to pay its bills 3. could be paying its employees higher wages 4. is paying its share of tax 5. is using its assets efficiently 6. has a gearing problem 7. is a candidate for being bought by another company or investor and more, once we have decided what we want to know then we can decide which ratios we need to use to answer the question or solve the problem facing us. There are ratios that will help us with question 1, but that wouldn't help us with question 2; and ratios that are good for question 5 but not for question 4 - we'll see! Let's look at the ratios we can use to answer these questions.

The Ratios
We can simply make a list of the ratios we can use here but it's much better to put them into different categories. If we look at the questions in the previous section, we can see that we talked about profits, having enough cash, efficiently using assets - we can put our ratios into categories that are designed exactly to help us to answer these questions. The categories we want to use, section by section, are: 1. Profitability: has the business made a good profit compared to its

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Financial Ratio Analysis - What do we want ratio analysis to tell us?

2. 3. 4. 5. 6.

turnover? Return Ratios: compared to its assets and capital employed, has the business made a good profit? Liquidity: does the business have enough money to pay its bills? Asset Usage or Activity: how has the business used its fixed and current assets? Gearing: does the company have a lot of debt or is it financed mainly by shares? Investor or Shareholder

Not everyone needs to use all of the ratios we can put in these categories so the table that we present at the start of each section is in two columns: basic and additional. The basic ratios are those that everyone should use in these categories whenever we are asked a question about them. We can use the additional ratios when we have to analyse a business in more detail or when we want to show someone that we have really thought carefully about a problem.

Users of Accounting Information
Now we know the kinds of questions we need to ask and we know the ratios available to us, we need to know who might ask all of these questions! This is an important issue because the person asking the question will normally need to know something particular. Of course, anyone can read and ask questions about the accounts of a business; but in the same way that we can put the ratios into groups, we should put readers and users of accounts into convenient groups, too: let's look at that now. The list of categories of readers and users of accounts includes the following people and groups of people: q Investors q Lenders q Managers of the organisation q Employees q Suppliers and other trade creditors q Customers q Governments and their agencies q Public q Financial analysts q Environmental groups q Researchers: both academic and professional Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - What do we want ratio analysis to tell us?

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Financial Ratio Analysis - What do the Users of Accounts Need to Know?

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What do the Users of Accounts Need to Know?
The users of accounts that we have listed will want to know the sorts of things we can see in the table below: this is not necessarily everything they will ever need to know, but it is a starting point for us to think about the different needs and questions of different users. Investors to help them determine whether they should buy shares in the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends. to determine whether their loans and interest will be paid when due might need segmental and total information to see how they fit into the overall picture information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities businesses supplying goods and materials to other businesses will read their accounts to see that they don't have problems: after all, any supplier wants to know if his customers are going to pay their bills! the continuance of a business, especially when they have a long term involvement with, or are dependent on, the business

Lenders

Managers

Employees

Suppliers and other trade creditors

Customers

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Financial Ratio Analysis - What do the Users of Accounts Need to Know?

Governments and their agencies

the allocation of resources and, therefore, the activities of business. To regulate the activities of business, determine taxation policies and as the basis for national income and similar statistics Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area they need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on many organisations now publish reports specifically aimed at informing us about how they are working to keep their environment clean. researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements

Local community

Financial analysts

Environmental groups

Researchers

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Financial Ratio Analysis - Which ratios will each of these groups be interested in?

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Which ratios will each of these groups be interested in?
On this page you should complete the table below (you can do this by printing it out). In the left hand column there is a list of interest groups one by one. Your job is to complete the right hand column by giving two or three examples of ratios they might be interested in. We have given an example of each to help you get started. When you've filled in the gaps you will appreciate that it gives us some ideas about the ratios that each of the users we have identified would be interested in looking at. Interest Group Investors Ratios to watch Return on Capital Employed

Lenders

Gearing ratios

Managers

Profitability ratios

Employees

Return on Capital Employed

Suppliers and other trade creditors Liquidity

Customers

Profitability

Governments and their agencies

Profitability

Local Community

This could be a long and interesting list

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Financial Ratio Analysis - Which ratios will each of these groups be interested in?

Financial analysts

Possibly all ratios

Environmental groups

Expenditure on anti-pollution measures Depends on the nature of their study

Researchers

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Financial Ratio Analysis - Brief Review of the Accounts

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Brief Review of the Accounts
It's all very well being armed with a list of ratios and people who might want to use them, but we need to know where to get all the figures to put into those ratios, don't we? Here's a reminder of the layout of a basic profit and loss account and of a basic balance sheet; we will look at more advanced versions later if we need to. If it helps, why not print out these financial statements and have them alongside you as you work through the ratios? These accounts, for Tesco plc, the retailing giant, also show two sets of titles: the titles on the left show the titles that you might be familiar with from your text books; the titles on the left are the ones we can find in published reports and accounts for a business. We have highlighted the terms and phrases that might be different in your books compared to published accounts. We will use these different terms almost constantly so you do need to read and understand them. We have highlighted the differences for you in this table: (ahhh, aren't we kind?) Tesco plc Text book version Consolidated profit and loss account for the year ended Sales Cost of Sales Gross Profit Operating Expenses Net Profit before other income/costs Other income/costs Net Profit before interest and taxation Net interest receivable (payable) 23 Feb 02 £m 23,653 -21866 1,787 -465 1,322 32 1,354 -153 Annual Report and Accounts Version Consolidated profit and loss account for the year ended Turnover Cost of sales Gross profit Operating expenses Operating profit Other costs/income Profit before interest and taxation Net interest receivable (payable)

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Financial Ratio Analysis - Brief Review of the Accounts

Net Profit on ordinary activities before taxation Tax on profit on ordinary activities Net Profit on ordinary activities after taxation Equity minority interests Profit for the year Dividends Retained profit

1,201 -371 830 0 830 -390 440 Tesco plc

Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit for the financial period Dividends Retained profit

Text book version Consolidated balance sheet Fixed assets Intangible Assets Tangible assets Investments Total Fixed Assets Current assets Stock Debtors Short term investments Cash at bank and in hand Total Current Assets Creditors Working Capital Total assets less current liabilities Long Term Liabilities 929 454 225 445 2,053

Annual Report and Accounts Version 23 Feb 02 Consolidated balance sheet £m 154 11,032 317 11,503 Fixed assets Intangible Assets Tangible assets Investments Total Fixed Assets Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand Total Current Assets

-4,809 Creditors: Amounts falling due within one year -2,756 8,747 Net current assets (liabilities) Total assets less current liabilities

-2,741 Creditors: Amounts falling due after more than one year -440 Provisions for liabilities and charges

Provisions for liabilities and charges

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Financial Ratio Analysis - Brief Review of the Accounts

Net assets Represented by Ordinary share capital Share premium Other reserves Profit and loss account Ordinary shareholders' funds Minority interests Capital Employed

5,566

Net assets Capital and reserves

350 2,004 40 3,136 5,530 36 5,566

Called-up share capital Share premium Other reserves Profit and loss account Equity shareholders' funds Minority interests Total capital employed

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Financial Ratio Analysis - Basic Profitability

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Basic Profitability
First some basic profitability equations: Gross Profit Margin = Gross Profit * 100 Turnover Operating Profit * 100 Turnover

Operating Profit Margin =

Net Profit Margin =

Net Profit * 100 Turnover Retained Profit * 100 Turnover

Retained Profit Margin =

Profit Mark up =

Profit * 100 Cost

What are you going to do if someone asks you to tell them whether a business is profitable or not? Firstly, do you remember what profit is? Profit is the difference between turnover, or sales, and costs: that is, profit = turnover - costs One problem is that there are several ways of measuring profit: gross profit; net profit before and after taxation; and retained profit are just some of them. So, you didn't print out those Tesco accounts we showed you did you? Well, look back at them to remind yourself of all these names for profit A profit margin is one of the profit figures we just mentioned shown as a percentage of turnover. They always tell us how much profit, on average, our business has earned per £1 of turnover. We already know from the ratios table that there are several ratios we could use to calculate the profitability of a business. Next we'll discuss gross and net profit margins. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Basic Profitability

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Financial Ratio Analysis - Gross Profit Margin

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Gross Profit Margin
First some basic profitability equations: Gross Profit Margin = Remember: Turnover = Sales Gross Profit = Turnover - Cost of Sales The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover our business is earning. Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin. Gross Profit * 100 Turnover

Here are a few examples of the gross profit margins from different businesses:
Leisure International Manufacturer Retailer Discount Refining Pizza Accounting & Airline Airline Restaurants Software Hotels Gross profit 9.64% 5.62% 35.14% 11.41% 27.46% 11.99% 47.52% 89.55%

See how the gross profit margins vary from business to business and from industry to industry. For example, the international airline has a gross profit margin of only 5.62% yet the accounting software business has a gross profit margin of 89.55%. If a company's raw materials and factory wages go up a lot, the gross profit margin will go down unless the business increases its selling prices at the same time. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Net Profit Margin

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Net Profit Margin
First some basic profitability equations: Net Profit Margin = Remember: Net Profit = Gross Profit - Expenses Why do we have two versions of this ratio - one for net profit and the other for profit before interest and taxation? Well, in some cases, you will find they use the term net profit and in other cases, especially published accounts, they use profit before interest and taxation. They both mean the same: look back at the financial statements for Tesco where we compared different names for the same things. The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and so on. Here are a few examples of the net profit margins from the same businesses we saw in the gross profit margin section: Leisure International Manufacturer Retailer Discount Refining Pizza Accounting & Airline Airline Restaurants Software Hotels Net Profit 7.36% 4.05% -10.48% 1.63% 10.87% 12.63% 7.55% 27.15% Net Profit Profit before Interest and Taxation * 100 = * 100 Turnover Turnover

Just like the gross profit margins, the net profit margins also vary from business to business and from industry to industry. When we compare the gross and the net profit margins we can gain a good impression of their non-production and non-direct costs such as administration, marketing and finance costs. We saw that the international airline's gross profit margin was the lowest of this group of eight businesses at only 5.62%; but look, its net profit margin is 4.05%, only a little bit lower than its gross profit margin. On the other hand, the discount airline's gross profit margin is 27.46% but its net profit margin is a lot less than that at 10.87%. As we just said, these comparisons give us a great insight into the cost structure of these businesses. Look at the software business too, a very high gross profit margin of 89.55% but a net profit margin of 27.15%. This is still high, but we can now see that the administration and similar expenses are very high whilst its cost of sales and operating costs are relatively very low. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 2 - Carphone Warehouse profit margin

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Activity 2 - Carphone Warehouse profit margin
Now that we know a bit about two profitability ratios, let's see how to use them. Here are parts of the profit and loss account for the Carphone Warehouse plc; we will use that information to calculate its gross and net profit margin. Carphone Warehouse Consolidated Profit and Loss Account for the year ended

31 March 2001 25 March 2000 £'000 £'000 697,720 505,738 191,982 129,359 41,389 -5,132 25,300

Turnover Cost of sales Gross profit Operating expenses Operating profit Other costs/income Profit before interest and taxation Let's put these ratios in a table:

1,110,678 830,126 280,552 176,960 66,016 6,555 45,012

Profitability Ratios for the Carphone Warehouse Ratio Name Profitability Ratio Formula For the year ended 31 Mar 01 25.26% 4.05% 31 Mar 01 25 Mar 00

Gross Profit Margin 280,552 ÷ 1,110,678*100 Net Profit Margin 45,012 ÷ 1,110,678*100

Look and see where these figures and ratios came from: don't do anything else until you have agreed with what it is in this table. We won't worry about what these results mean just yet.

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Financial Ratio Analysis - Activity 2 - Carphone Warehouse profit margin

Your Turn: Profitability 1 Did you see that for the year ended 25 March 2000, we didn't give you the ratio results? Well spotted! So, using the profit and loss account above, calculate the gross and net profit margins for the Carphone Warehouse for the year ended 25 March 2000, enter those ratios in the table above. Did you get this? Now we have some information to make comments on. The Carphone Warehouse has given us almost the same profitability results for the two years. This suggests the business is being managed in a stable way. From what we know about the mobile phone industry, we might say that it is good that they have been so stable because the industry has been changing and growing so quickly. We still can't say, though, whether a gross profit margin of about 25% is good or bad and we can't say whether a net profit margin of around 4% is good or bad: we still need even more information. There are two ways to tell whether ratio result is good: q find ratio values for the business we are looking at for three, four or more year, preferably more: this is known as trend analysis; q find ratio values for other businesses in the same industry: this is known as inter firm comparison We don't have more than two years' worth of data for the Carphone Warehouse but we do have data for Vodafone, another business in the mobile telephone industry. In the next activity we examine the data for Vodafone ... Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 3 - Vodafone profit margin

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Activity 3 - Vodafone profit margin
Use the database in this section of this site to find the data you need to calculate the gross and net profit margins for Vodafone plc ... be ready, there are some losses to deal with here. You use this table to enter your results. Vodafone plc Profitability Gross Profit Margin Net Profit Margin Did you get this? Let's discuss what these results mean. Firstly, Vodafone has, compared to the Carphone Warehouse, an apparently healthy gross profit margin: Vodafone's gross profit margin is around 40% compared to the Carphone Warehouse's gross profit margin of around 25%. However, look at the net profit margin: something strange is happening to Vodafone because it has made a net loss for both of the two years. Take a look at Vodafone in the database for more information on what might have gone wrong. Vodafone's operating expenses have increased by £8 billion over the year whilst turnover has increased by £6.2 billion; and the cost of sales has increased by £4.7 billion. The net effect of these changes is that losses have gone from -6.9 billion to -12.7 billion: a huge increase in the net loss. So, even though the businesses are in the same industry, they have very different results, we can say they have very different 'profiles'. Why not try some more profitability questions? Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map 31 Mar 2002 31 Mar 2001

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Financial Ratio Analysis - Activity 3 - Vodafone profit margin

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Financial Ratio Analysis - Profitability - Additional Question 1

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Profitability - Additional Question 1
Here is part of the profit and loss account for Marks & Spencer for two years. Compare these results by calculating the ratios named below and discuss what you find. . Gross profit margin b. Operating profit margin Consolidated profit and loss for the year Marks & Spencer plc 2002 £m Turnover Cost of sales Gross profit Operating expenses Operating profit Did you get this? Why not try question 2? Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map 8,135.4 -6,862.5 1,272.9 -629.1 643.8 2001 £m 8,075.7 -7,154.3 921.4 -480.9 440.5

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Financial Ratio Analysis - Profitability - Additional Question 2

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Profitability - Additional Question 2
J Sainsbury plc has published the following two years' worth of turnover and profit information. Calculate the following ratios and make comments on what you find. . Gross profit margin b. Operating profit margin c. Net profit before interest and taxation margin Consolidated profit and loss account for the year ended J Sainsbury plc 30-Mar-02 30-Mar-01 £m Turnover Cost of sales Gross profit Other selling and distribution costs Operating profit Other costs/income Profit before interest and taxation Did you get this? Try question 3. Section Index | Previous | Next | Next Section | Section Map 17,162 -15,905 1,257 -632 625 -5 620 £m 17,244 -16,082 1,162 -629 533 -20 513

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Financial Ratio Analysis - Profitability - Additional Question 3

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Profitability - Additional Question 3
Go to the database and find the data for the Hilton Group plc and calculate and comment on the following ratios for the two years for which data is available: . Gross profit margin b. Operating profit margin c. Net profit before interest and taxation margin Did you get this? Try question 4. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability - Additional Question 4

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Profitability - Additional Question 4
Go to the database and for any business you wish, calculate the following ratios from the data you find there and comment on your findings: . Gross profit margin b. Operating profit margin c. Net profit before interest and taxation margin Did you get this? Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse

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Advanced Profitability
First some advanced profitability equations: PBIT = Profit before Interest and Taxation * 100 Turnover

PBT =

Profit for the Year * 100 Turnover Net Profit * 100 Turnover

Profit for the Year Margin =

Administration costs % =

Administration costs * 100 Turnover

Interest costs % =

Interest costs * 100 Turnover Total Overhead Costs * 100 Cost

Overhead costs % =

Who uses these Profitability Ratios? Look back at the table of users and what they use to see who might use a profitability ratio... now think about why they use them and what the results tell them. Use the Profitability Ratios 2: more advanced Now that we have worked through some of the basic profitability ratios, let's sharpen our pencils and get our calculators out and do some more advanced analysis... Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse

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Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse

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Advanced Profitability - Activity 5 Carphone Warehouse
Here are the sales and profit data for the Carphone Warehouse, mobile communications company, for the latest two years. What we want to know is whether the Carphone Warehouse is a profitable company ... and how do we know? Following the Profit and Loss Account for the Carphone Warehouse, below is the profitability section of our ratio table and we have included the name of the ratio, the formula and the workings for the year ended 31 March 2001. Carphone Warehouse Consolidated Profit and Loss Account for the year ended Turnover Cost of sales Gross profit Operating expenses Operating profit Other costs/income Profit before interest and taxation Net interest receivable (payable) Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit for the financial period Dividends 31 March 2001 25 March 2000 £'000 1,110,678 -830,126 280,552 -176,960 66,016 -21,004 45,012 2,385 47,397 -8,675 38,722 -563 38,159 0 £'000 697,720 -505,738 191,982 -129,359 41,389 -16,089 25,300 -196 25,104 -8,831 16,273 54 16,327 0

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Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse

Retained profit

38,159

16,327

Here is a list of the profitability ratios for the year ended 31 March 2001 for the Carphone Warehouse. Read down this page and make sure you can follow where all the figures come from as we work through these ratios... and make sure that you agree with the answers you see here... then you should repeat the calculations for the year ended 25 March 2000. Note: we don't have any administration and overhead costs so we can't calculate those ratios; but we do have interest and operating costs so we can report those instead. Here are the figures for the year ended 31 March 2001, put into ratio format, that you should have extracted from the Profit and Loss Accounts and that you will then have used to calculate the ratio values... check that you agree with them and then repeat what you see there for the year ended 25 March 2000. Carphone Warehouse Basic Ratios Gross profit margin Operating profit margin Net profit margin Retained profit margin Profit mark up Additional Ratios Profit before interest and taxation % Profit before taxation % Profit for the year % Operating costs % Interest costs % 45,012/11,10,678 * 100 = 47,397/11,10,678 * 100 = 38,159/11,10,678 * 100 = 176,960/1,110,678 * 100 = 2,385/1,110,678 * 100 = For the year ended 31 Mar 01 280,552/1,110,678 * 100 = 660,16/1,110,678 * 100 = 45,012/1,110,678 * 100 = 38,159/1,110,678 * 100 = 280,552/830,126 * 100 = 25 Mar 00

Here are the ratio answers for the year ended 31 March 2001 Carphone Warehouse Basic Ratios Gross profit margin Operating profit margin Net profit margin Retained profit margin Gross profit mark-up
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For the year ended 31 Mar 01 25 Mar 00 25.26% 5.94% 4.05% 3.44% 33.80%

Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse

Additional Ratios Profit before interest and taxation % Profit before taxation % Profit for the year % Operating costs % Interest costs % Did you get this? Now we need to interpret what we've found: what do all of these ratio results mean? In fact, these results are remarkably consistent from year to year. Follow through our analysis of the Carphone Warehouse as it unfolds in this section of this site and keep referring back to these profitability ratios to see how they fit in with our overall view of this business. You can try some advanced profitability questions or move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help 4.05% 4.27% 3.44% 15.93% 0.21%

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Financial Ratio Analysis - Advanced Profitability - Additional Question 5

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Advanced Profitability - Additional Question 5
Following on from question 1, go to the database and for Marks & Spencer, gather enough information to enable you to do the following and, including your findings from question 1, comment on what you find: Calculate the profit margin: . before interest and taxation b. before taxation c. for the financial period Did you get this? Try question 6. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Advanced Profitability - Additional Question 6

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Advanced Profitability - Additional Question 6
J Sainsbury plc's published accounts contain the following historical information. Use both ratios and graphs to highlight Sainsbury's performance over these five years. 1. You should prepare a graph or graphs that show: . Turnover trends b. Operating profit trends c. Group profit before tax trends 2. You should also identify: . Operating profit margin in total b. Group profit before tax margin c. Interest payable as a percentage of turnover d. Operating profit trend segment by segment 3. Advanced - Estimate Sainsbury's total costs from the group turnover and profit before taxation data and then prepare a break-even chart that will help you to estimate Sainsbury's break even point. Five year review (£m) Group turnover Operating profit Source of operating profit by segment Sainsbury's Supermarkets Sainsbury's Bank Shaw's Supermarkets Other operating activities Profit sharing 751 -15 37 10 -39 711 -5 52 12 -40 518 3 79 16 -9 470 13 115 25 -8 515 22 137 15 -10 1991 1992 2000 2001 2002

15,496 16,378 17,414 18,441 18,206 790 794 651 628 677

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Financial Ratio Analysis - Advanced Profitability - Additional Question 6

Discontinued operations Interest payable Profit/(Loss) from joint ventures Group profit before taxation

46 -78 16 728

64 -50 12 756

44 -72 1 580

13 -76 -3 549

-2 -49 -1 627

4. Advanced - Estimate Tesco's total costs from the data that follows and then prepare a break-even chart that will help you to estimate its break-even point. Contrast this chart with the break even chart you prepared for Sainsbury plc Tesco Data for break even analysis Turnover Profit for the financial year 1998 1999 2000 2001 2002

16,452 17,158 18,796 20,988 23,653 532 606 674 722 830

Total Costs (Turnover 15,920 16,552 18,122 20,266 22,823 - Profit for the year) Did you get this? Move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 2 - Carphone Warehouse profit margin - answer

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Activity 2 - Carphone Warehouse profit margin - answer
The Carphone Warehouse Profitability Gross Profit Margin Net Profit Margin 31 March 2001 25 March 2000 25.26% 4.05% 27.52% 3.63%

Check again if you have a problem and ask your teacher/lecturer for help if it's not clear. Back to Activity 2 - Carphone Warehouse profit margin Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 3 - Vodafone profit margin - answer

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Activity 3 - Vodafone profit margin answer
Vodafone plc Profitability Gross Profit Margin Net Profit Margin 31 Mar 2002 31 Mar 2001 41.14% -55.57% 42.00% -46.05%

Check again if you have a problem: ask your teacher/lecturer for help if it's not clear. Back to Activity 3 - Vodafone profit margin Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability - Additional Question 1 answer

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Profitability - Additional Question 1 answer
Solution Marks & Spencer Profitability Gross profit margin Operating profit margin 2002 2001

15.65% 11.41% 7.91% 5.45%

M&S has had a successful year in 2002 as its rates of gross and operating profitability have increased. Whilst turnover has increased only slightly over the two year period, profits have grown more quickly. Why not try question 2? Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability - Additional Question 2 answer

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Profitability - Additional Question 2 answer
J Sainsbury Profitability Gross profit margin Operating profit margin Net profit margin 30-Mar-02 30-Mar-01 7.32% 3.64% 3.61% 6.74% 3.09% 2.97%

Although Sainsbury's have increased their profitability ratios, they have not done so by very much. Compared to M&S, in question 1, the increases in profitability for Sainsbury have been poor. Try question 3. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability - Additional Question 3 answer

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Profitability - Additional Question 3 answer
The Hilton Group Profitability Gross profit margin Operating profit margin Net profit margin 31 December 2001 31 December 2000 8.09% 6.14% 6.71% 9.64% 7.81% 7.36%

The Hilton Group has had a worse 2001 than it had in 2000. By all three measures of profitability it is now worse off than it was before. Try question 4. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Profitability - Additional Question 4 answer

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Profitability - Additional Question 4 answer
Since you could have chosen any one of the businesses in the database, it is not feasible to try to give all of the answers here. Work through questions 1 - 3, check your answers and workings and then try question 4. You should then be confident that your work is accurate. Additional notes are available on advanced profitability or you can move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Advanced Profitability answer

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Advanced Profitability answer
Carphone Warehouse Basic Ratios Gross profit margin Operating profit margin Net profit margin Retained profit margin Gross profit mark up Additional Ratios Profit before interest and taxation % Profit before taxation % Profit for the year % Operating costs % Interest costs % Back to advanced profitability? Section Index | Previous | Next | Next Section | Section Map 4.05% 4.27% 3.44% 15.93% 0.21% 3.63% 3.60% 2.34% 18.54% -0.03% For the year ended 31 Mar 01 25 Mar 00 25.26% 5.94% 4.05% 3.44% 33.80% 27.52% 5.93% 3.63% 2.34% 37.96%

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Financial Ratio Analysis - Advanced Profitability - Additional Question 5 answer

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Advanced Profitability - Additional Question 5 answer
Marks & SpencerProfitability 2002 2001 1.63% 1.80% Profit before interest and taxation % 3.91% Profit before taxation % Profit for the year % The results from question 1 were: Gross profit margin Operating profit margin 15.65% 11.41% 7.91% 5.45% 4.13%

1.88% -0.07%

We can see that in every respect M&S has performed much better in 2002 than it did in 2001. We might ask the question now, though, of whether 2001 was a bad year for the business? After all, a good year could be the result of sorting out a bad year. It can, of course, mean that M&S really has just had a good year! Try question 6. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Advanced Profitability - Additional Question 6 answers

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Advanced Profitability - Additional Question 6 answers
1. The graph below shows the profit on the left hand vertical axis and the turnover on the right hand vertical axis. As we can see whilst turnover has increased over the five years until the final year, profits have tended to fall: they have recovered slightly in the final year, however.

2. The ratio values, first of all, for the profitability measures are: Sainsbury Profitability ratios Total operating profit margin Group profit before tax margin Interest payable as a percentage of turnover 1991 1992 2000 2001 2002

5.10% 4.85% 3.74% 3.41% 3.72% 4.70% 4.62% 3.33% 2.98% 3.44% 0.50% 0.31% 0.41% 0.41% 0.27%

In general, we can see that Sainsbury managed to hold its profitability rates steady for the period 2000 to 2002. However, profitability was better over the period 1998 - 1999. Clearly, profit margins have suffered at Sainsbury, this could possibly be as a result of competition in the supermarket business (their largest segment) or as a result of management problems. Our analysis of the trends in the segmental operating profit might help us to explain what is happening.

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Financial Ratio Analysis - Advanced Profitability - Additional Question 6 answers

We can see major changes in the profit mix at Sainsbury. Supermarkets are now contributing significantly less than they were five years ago; Sainsbury's bank is virtually operating at break even point since its profits are so small; Shaw's supermarket division is returning ever increasing profits and the profit sharing part of the business is suffering as a result of the drop in the overall profitability of the business. 3. Sainsbury's break-even chart:

Whilst we don't see a break-even point for Sainsbury, we can see that it may be heading for it! Profits are falling year by year and this break-even chart helps to illustrate that Sainsbury's total costs are almost equal to its turnover. From a mathematical point of view, we can use a spreadsheet or statistical package to help us to find out that Sainsbury's total fixed costs amount to -£1715.5 million per year: an unusual result since it's negative but that's not a surprise for data such as this where we only have five data points for each value. If you are familiar with the high-low method of calculating total fixed costs you can use it to find that they are around -£1,670 million per year: a bit different from what
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Financial Ratio Analysis - Advanced Profitability - Additional Question 6 answers

the spreadsheet told us; but not too far away. Again, the value is negative and again that's unusual but the graph we have drawn is the important thing here,

As with the Sainsbury break-even chart, this break-even chart doesn't directly show us the break even point. However, if we were to extend the curves backwards towards the vertical axis in the case of Tesco, we would see a break-even point for them as the following version of Tesco's break-even chart shows - a break-even point of around £6,750: to see whether you agree with this value, print out this revised chart and make your own estimate of the break-even point.

Notice again that because we are dealing with overall data for the business, our estimate of total fixed costs is not reliable. In this case total fixed costs are estimated to be around £60 million. Check this estimate from the chart, if you print it out. Alternatively put the data into a spreadsheet and estimate the fixed costs from there. Move on to the Rate of Return section. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Advanced Profitability - Additional Question 6 answers

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Financial Ratio Analysis - Return on Capital Employed Ratio - answer

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Return on Capital Employed Ratio answer
ROCE For the Carphone Warehouse 31 March 2001 Profit for the year 38,159 = 8.74% Equity shareholders' funds 436,758 25 March 2000 Profit for the year 16,273 Equity shareholders' funds 44,190 Back to Return on Capital Employed Ratio? Section Index | Previous | Next | Next Section | Section Map = 36.95%

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Financial Ratio Analysis - Activity 6 - Vodafone ROCE answer

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Activity 6 - Vodafone ROCE answer
ROCE For Vodafone 31 March 2002 Profit for the year -16,155 = -12.37% Equity shareholders' funds 130,573 31 March 2001 Profit for the year -9,885 = -6.82% Equity shareholders' funds 145,007 Notice Vodafone's ROCE for both years is negative. This is not good. More than that, Vodafone's capital employed didn't grow between the two years; in fact, it shrank. Something else has gone wrong with Vodafone maybe we will discover their problems as we work through the rest of these ratios. Back to Activity 6 - Vodafone ROCE? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Return on Total Assets Ratio answer

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Return on Total Assets Ratio answer
ROTA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax 45,012 = 6.32% Total Assets 711,703 25 March 2000 Profit before Interest and Tax 25,300 = 9.32% Total Assets 271,439 Back to Return on Total Assets Ratio? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 7 - Vodafone ROTA answer

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Activity 7 - Vodafone ROTA answer
ROTA For Vodafone 31 March 2002 Profit before Interest and Tax -12,694 = -7.79% Total Assets 162,900 31 March 2001 Profit before Interest and Tax -6,909 = -4.01% Total Assets 172,390 Back to Vodafone ROTA? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Rate of Return - Additional Question 7 answer

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Rate of Return - Additional Question 7 answer
2002 Return on Capital Employed 4.97% Return on Total Assets 2001 -0.12%

2.1% -0.071%

Back to Rate of Return - Additional Question 7. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Return on Fixed Assets answer

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Return on Fixed Assets answer
ROFA For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax 45,102 = 11.36% Fixed Assets 396,175 25 March 2000 Profit before Interest and Tax 25,300 = 25.23% Fixed Assets 100,279 Return to Return on Fixed Assets. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Return on Working Capital answers

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Return on Working Capital answers
ROWC For the Carphone Warehouse 31 March 2001 Profit before Interest and Tax 45,012 = 48.31% Working Capital 93,180 25 March 2000 Profit before Interest and Tax 25,300 = -951.13% Working Capital -2,660 Back to Return on Working Capital? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Rate of Return - Additional Question 8 answer

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Additional Question 8 answer
2002 Return on Fixed Assets 2001 9.28% 3.15%

Return on Working Capital 15.84% 8.58% Back to additional question 8. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Rate of Return - Additional Question 9 answer

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Additional Question 9 answer
We would analyse the data we were given in a number of ways: q Graphically q Calculate new ratios q Calculate rates of growth ratios We chose to concentrate on the rates of growth ratios - the percentage increase from year to year in each of the values we were given. In addition, we have highlighted exceptional performance by showing any growth that is negative in red and any growth that exceeds 50% in blue; all other values are in ordinary type. We chose the 50% threshold to represent exceptional positive growth just for demonstration purposes we could have chosen 20%, 175% or any other threshold that we consider to be exceptional. Growth ratios Turnover Turnover by segment UK Rest of Europe Asia 5.77% -21.20% n/a 7.09% 17.74% 197.44% 8.34% 27.80% 85.34% 9.14% 25.46% 62.56% 1998 - 99 1999 - 2000 2000 - 01 2001 - 02 4.29% 9.55% 11.66% 12.70%

Operating profit Operating profit by segment UK Rest of Europe Asia

5.81%

8.08%

12.56%

13.46%

5.03% 29.73% n/a

8.05% 6.25%

10.78% 37.25%

10.27% 28.57%

-50.00% -500.00% 625.00%

Profit on ordinary activities before taxation Profit for the financial year

10.79%

10.81%

12.97%

13.95%

13.91%

11.22%

7.12%

14.96%

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Financial Ratio Analysis - Rate of Return - Additional Question 9 answer

Return on shareholders' funds Return on capital employed

0.00% -8.02%

-1.88% -6.40%

8.61% 3.11%

2.20% -3.01%

We can see some very good performances here in terms of sales and profit: the Asian sector seems strong in terms of sales, albeit from a relatively small base in 1999, although Asian profitability is weak. The rest of Europe is also relatively strong, meaning that the UK, the largest segment in the business is pulling back overall growth. Profitability is climbing steadily, although not exceptionally; but returns on shareholders' funds and capital employed are weak to poor. Back to additional question 9. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Rate of Return - Additional Question 10 answer

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Additional Question 10 answer
Again, we have a number of possible ways of analysing the data we were given. We could have prepared some graphs and ratios but this time we have chosen to compare the total with the UK by deriving simple ratios: Total ÷ UK for each relevant heading. These ratios provide us with an idea of how stable the relationships are as between the entire group and the UK operations. To highlight exceptional relationships this time, we have set the threshold at the ratio of 1.2. That is if the group: UK ratio is greater than 1.2, we see that as exception ... we could have chosen 1.1 or 1.5 ... Similarly, if the ratio has fallen below 1, we have highlighted that too. The figures in red, greater than 1.2, show that the UK is falling behind the rest of the group in terms of the numbers of stores and so on. Of course, this is not necessarily a bad thing since the business is diversifying now and would like to see Europe and Asia becoming more important. These ratios do show, though, that Tesco is undergoing significant change over the five year period. Ratio of Group to UK Number of stores Total sales area - 000 sq ft Average store size (sales area - sq ft) Full time equivalent employees 1998 1.264 1.200 0.917 1999 1.285 1.337 1.015 2000 1.282 1.423 1.068 2001 1.311 1.579 1.131 2002 1.343 1.726 1.161

1.192

1.211

1.244

1.335

1.417

UK retail productivity £ Turnover per employee Profit per employee 149,798 8,755 151,138 8,771 156,426 9,160 161,161 9,649 165,347 10,002

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Financial Ratio Analysis - Rate of Return - Additional Question 10 answer

Weekly sales per sq ft Wages per employee Growth rates: UK productivity Turnover per employee Profit per employee Weekly sales per sq ft Wages per employee

18.92 15,079

19.06 15,271 1998 - 99

19.30 15,600 1999 2000 3.50% 4.43% 1.26% 2.15%

19.67 16,087

20.49 16,821

2000 - 01 2001 - 02

0.89% 0.19% 0.74% 1.27%

3.03% 5.34% 1.89% 3.12%

2.60% 3.66% 4.17% 4.56%

We should all be able to agree with the UK retail productivity figures we were asked to provide. Here is how we got these results: Turnover per employee Profit per employee UK turnover ÷ UK full time equivalent employees UK profit ÷ UK full time equivalent employees

Weekly turnover per sq ft UK turnover ÷ total square feet ÷ 52 weeks Finally, the growth rates derived from the UK productivity figures give us a good idea of how well the UK's operations are doing vis-a-vis the group and so on. Back to additional question 10. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Rate of Return - Additional Question 11 answer

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Additional Question 11 answer
Go to the database and find the data for both British Airways plc and easyJet plc that will allow you to calculate and comment on the following ratios: British Airways 31 March 02 Return on Capital Employed Return on Total Assets -7.04% 0.57% 31 March 01 3.16% 2.74% easyJet 30-Sep-01 30-Sep-00 11.98% 7.50% 33.63% 11.01%

easyJet's rates of return are far superior to those of British Airways (BA), the old, long established traditional airline. There are many reasons why easyJet should out perform BA, such as the fact that easyJet is a new, very dynamic company that is not facing stiff competition on cross-Atlantic routes. easyJet is a much smaller operation than BA with a fleet of aircraft that is only a fraction of the size of BA's. Hence easyJet's fixed costs ought to be far less than BA's and so on. On the other hand, shouldn't we expect BA to enjoy economies of scale and managerial efficiencies that should help it to perform better than easyJet? A key factor in BA's results is the consequence of the bombing of the World Trade Centre in September 2001 and the effect that had on world airline travel. At the time of writing, BA has just announced that this tragedy has only just begun to wear off. easyJet did not suffer the same problems as BA following the bombing, as it is an entirely Europe-centred airline. Finally, we can see that easyJet's ratios have fallen in value from 2000 to 2001. 2002's results will be interesting from that point of view, to see whether they have continued to fall. ADVANCED British Airways easyJet

31 March 02 31 March 01 30-Sep-01 30-Sep-00

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Financial Ratio Analysis - Rate of Return - Additional Question 11 answer

Return on Fixed Assets Return on Working Capital

0.70% -12.15%

3.37% -49.60%

17.60% 21.40%

13.96% -97.36%

These ratios for BA and easyJet shed more light on their performances but overall they give us the same message. However, easyJet's management of its fixed assets and working capital have improved significantly over the two years. BA's performance here is still lacklustre! Back to additional question 11. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 9 - Vodafone Current Ratio answer

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Activity 9 - Vodafone Current Ratio answer
Current Ratio For Vodafone 31 March 2002 Current Assets: Current Liabilities 31 March 2001 Current Assets: Current Liabilities Back to Activity 9 - Vodafone Current Ratio. Section Index | Previous | Next | Next Section | Section Map 9,438: 13,455 0.70: 1 18,182: 12,377 1.47: 1

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Financial Ratio Analysis - The Acid Test Ratio answer

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The Acid Test Ratio answer
31 March 2001 25 March 2000 Current Assets Stocks: Current Liabilities Current Assets Stocks: Current Liabilities (315,528-52,437): 222,348 1.18: 1

(171,160-51,842): 173,820 0.69: 1

Back to The Acid Test Ratio. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 10 - Vodafone Acid Test Ratio answer

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Activity 10 - Vodafone Acid Test Ratio answer
Acid Test Ratio For Vodafone 31 March 2002 31 March 2001 Current Assets Stocks: Current Liabilities Current Assets Stocks: Current Liabilities (9,438-513): 13,455 0.66: 1

(18,182-316): 12,377 1.14: 1

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Financial Ratio Analysis - Liquidity - Additional question 12 answer

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Liquidity - Additional question 12 answer
Marks & Spencer Safeway Sainsbury Tesco Thorntons

2002 2001 2002 2001 2002 2001 2002 2001 2001 2000 Current ratio Acid Test ratio 2.1 2.0 1.8 1.5 -0.5 -0.2 -0.4 -0.2 0.8 0.6 0.9 0.7 0.4 0.2 0.4 0.2 0.7 0.4 0.8 0.3

The first thing to notice here is that only M&S has a current ratio of around 2:1 and none of them has an acid test ratio value of 1: 1 ... these are all highly successful businesses and they are surviving on working capital ratios that are even negative in the case of Safeway. These results help us to appreciate that there is no such thing as an ideal ratio value EXCEPT that the business itself will set its own ratio targets and will work to maintain or achieve them. That is, M&S is presumably happy with a current ratio of around 2: 1, Safeway is presumably happy with a negative current ratio; and so on for all business in this sample: all retailing business, by the way, in case you hadn't spotted! As a matter of interest, the following table shows the supermarket industry's overall working capital ratios for the years shown: Supermarkets 1988/89 1989/90 1990/91 Current ratio Acid Test ratio 0.6 0.3 0.6 0.3 0.6 0.4

Retailers have been working with such low working capital ratios for a long time, then. Back to Additional question 12. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Liquidity - Additional question 12 answer

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Financial Ratio Analysis - Liquidity - Additional question 13 answer

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Liquidity - Additional question 13 answer
BAA 2002 2001 Current ratio Acid Test ratio 1.6 1.6 0.8 0.7 British Airways 2002 0.8 0.8 2001 0.8 0.7 easyJet 2001 2000 2.6 2.6 0.7 0.7

We can see great variability in the working capital ratios now as BA has low ratios and BAA has relatively high ratios, by the end of 2002 anyway. Why has easyJet's ratios suddenly almost quadrupled, though? Let's look at the working capital section of its balance sheet: easyJet Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand Total Current Assets 2001 0 47,106 0 244,435 291,541 2000 0 40,959 0 14,088 55,047

Creditors: Amounts falling due within one year -113,428 -84,483 Net current assets (liabilities) 178,113 -29,436

easyJet has had a massive injection of cash - from an issue of share capital that it had not spent (on new aircraft) by the end of the year. If we take out the additional cash, we can calculate its ratios again to give us the underlying working capital situation. We'll assume that cash would have been the same in 2001 as it was in 2000 for this exercise: Revised ratios for 2001 easyJet 2001 2000 Current ratio Acid Test ratio 0.5 0.5 0.8 0.7

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Financial Ratio Analysis - Liquidity - Additional question 13 answer

We now see that easyJet's working capital management might be even more strict than it had been before, providing our estimate of its basic cash position is a good one. In any case, all three transport-related businesses are managing their working capital aggressively by setting their ratios at such low levels. Back to Additional question 13. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Liquidity - Additional question 14 answer

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Liquidity - Additional question 14 answer
Whilst different industries have different characteristics, and therefore should have different working capital ratio values, we can't say that retailing and transport in the UK are radically different from each other in that both industry samples have the same values as each other. Nevertheless, the average current and acid test ratios do show some differences: Industry Averages for the latest year Retail Transport Current ratio Acid Test ratio 0.7 0.6 1.7 1.7

Overall, and as we should expect, retailing, a cash based industry, has significantly lower working capital ratios. Moreover, our discussions in questions 12 and 13 and our findings here help to prove that there can be no such thing as an overall ideal ratio value. However, we can begin to say that there might be an ideal, or at least a target, value for a ratio value. Back to Additional question 14. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Activity 11 - Vodafone total asset turnover ratio answer

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Activity 11 - Vodafone total asset turnover ratio answer
Vodafone 31 Mar 2002 31 Mar 2001 Consolidated profit and loss account for the year ended Turnover Total Fixed Assets Total Current Assets £m 22,845 153,462 9,438 £m 15,004 154,208 18,182

Total Asset Turnover Ratios 0.14 0.09

Total Asset Turnover =

Turnover Total Assets

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Financial Ratio Analysis - Fixed Asset Turnover answer

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Fixed Asset Turnover answer
Fill in the figures and calculate the ratio values Fixed Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 2.80 times 396,175 697,720 100,279 6.96 times

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Financial Ratio Analysis - Current Asset Turnover answer

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Current Asset Turnover answer
Current Asset Turnover Ratio for the Carphone Warehouse 31 March 2001 25 March 2000 1,110,678 3.52 times 315,528 697,720 171,160 4.08 times

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Financial Ratio Analysis - Activity 12 - Vodafone Fixed and Current Asset Turnover ratios answer

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Activity 12 - Vodafone Fixed and Current Asset Turnover ratios answer
31 Mar 2002 31 Mar 2001 Vodafone Turnover Total Fixed Assets Total Current Assets £m 22,845 153,462 9,438 £m 15,004 154,208 18,182

Fixed Asset Turnover Ratio for Vodafone 31 March 2002 31 March 2001 22,845 0.15 times 153,462 15,004 0.10 times 154,208

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Financial Ratio Analysis - Activity 13 - Vodafone Capital Employed Turnover answer

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Activity 13 - Capital Employed Turnover answer
Vodafone 31 Mar 2002 31 Mar 2001 £m Turnover Capital and reserves Called-up share capital Share premium Other reserves Profit and loss account Equity shareholders' funds 4,273 52,044 99,862 -25,606 130,573 4,054 48,292 97,938 -5,277 145,007 22,845 £m 15,004

Capital Employed Turnover Ratio for Vodafone 31 March 2002 31 March 2001 22,845 0.17 times 130,573 15,004 0.10 times 145,007

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Financial Ratio Analysis - Activity 14 - Vodafone Working Capital Turnover answer

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Activity 14 - Vodafone Working Capital Turnover answer
Vodafone 31 Mar 2002 31 Mar 2001 £m Turnover Net current assets (liabilities) 22,845 -4,017 £m 15,004 5,805

Working Capital Turnover Ratio for Vodafone 31 March 2002 31 March 2001 22,845 -5.69 times -4,017 15,004 2.58 times 5,805

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Financial Ratio Analysis - Activity 15 - Vodafone Stock Turnover answer

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Activity 15 - Vodafone Stock Turnover answer
Vodafone 31 Mar 2002 31 Mar 2001 £m Cost of sales Stock 13446 513 £m 8702 316

Stock Turnover Ratio for the Vodafone 31 March 2002 31 March 2001 513 13,446 ÷ 365 316 8,702 ÷ 365 13.93 days 13.25 days

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Financial Ratio Analysis - Activity 16 - Vodafone Debtors' Turnover Ratio answer

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Activity 16 - Vodafone Debtors' Turnover Ratio answer
Vodafone 31 Mar 2002 31 Mar 2001 £m Turnover Debtors due within one year 22,845 7,053 £m 15,004 4,587

Debtors Turnover Ratio for Vodafone 31 March 2002 7,053 112.69 days 22,845 ÷ 365 31 March 2001 4,587 111.59 days 15,004 ÷ 365 Back to Activity 16 - Vodafone Debtors' Turnover Ratio. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 15 solution

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Additional question 15 solution
Sage Asset Usage Total Asset Turnover Stock Turnover Debtors' Turnover Creditors' Turnover 2001 0.47 16.61 71.81 2000 0.56 21.10 75.60

996.33 933.80

We know that it is difficult to comment on only two year's worth of ratio results and the case of Sage, the accounting software developer and supplier, is no exception! Total asset turnover seems poor at much less than 1: 1, stock turnover is fine at around 17 days in 2002. Sage's credit control seems to be badly managed, though. Debtors' turnover is very high at 72 days in 2002 and it was 76 days the year before that. This means that Sage sells on credit and then waits for eight weeks to be paid. Is this good? Should Sage be doing something about this situation? Look at what we said in the answer to question 12 businesses will set their own ratio targets and it is probable that Sage is happy with eight weeks and this is probably the industry norm for this kind of business. If this is not true then Sage needs a new credit controller! As far as creditors are concerned, we have a strange situation on the face of it with payment terms of around three years! Unlikely don't you think? Let's look at their creditors' due within one year information in more detail ... from the notes to the accounts, we have: Creditors: amounts falling due within one year Group Current portion of loans (note 15(a)) Bank overdraft (note 24(b)) Current portion of finance lease obligations (note 15(b)) Trade creditors Amounts owed to Group undertakings 2001 £'000 7,584 10 57 43,801 0 2000 £'000 8,131 402 199 37,651 0

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Financial Ratio Analysis - Additional question 15 solution

Corporation tax Other creditors, taxes and social security costs Accruals Deferred consideration on acquisitions and cost of share options assumed Proposed dividend

31,255 12,188 20,962 19,039 3,583

17,537 11,238 15,271 16,499 3,250

138,479 110,178 So, only around a third of the creditors' falling due within one year relate to trade creditors - let's rework the ratio and see the true value: 2001 2000

Adjusted Creditors' turnover ratio 315.14 319.11 The ratio is still exceptionally high, at almost a year, so we still have a problem as this result is unlikely to be true. However, there is no more information in the annual report that can help us, so we can simply conclude that we need more information but we're not going to get it! Back to Additional question 15. Back to Creditors' Turnover Ratio Additional notes are available on advanced stock, creditors and debtors or you can move on to the Gearing section. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Creditors' Turnover: Advanced 2 - answer

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Creditors' Turnover: Advanced 2 answer
You need to multiply both sides of the equation by X2001 365 Then cancelling and rearranging gives: X2001 = 144,908 * 365 = 997,951.3 53 ... that is, if the creditor days are 53 and the creditors' balance is £144,908, then the amounts invoiced by the business in the period must be £997,951.3 The second one ... did you get this? 45 days = Creditors = 75,948 = Cost of sales X2001 365 365 X2001 = 75,948 * 365 = 616,022.7 53 Back to Creditors' Turnover: Advanced 2 Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 17 : Vodafone creditors' turnover ratio answer

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Activity 17 : Vodafone creditors' turnover ratio answer
2002 Creditors: amounts falling due within one year Bank loans, other loans and overdrafts Commercial paper Finance leases Trade creditors Amounts owed to subsidiary undertakings Amounts owed to associated undertakings Taxation Other taxes and social security costs Other creditors Accruals and deferred income Proposed dividend £m 1,219 100 3,335 10 3,107 509 1,485 3,179 511 2001 £m 3,601 10 1,899 7 2,540 285 1,314 2,257 464

13,455 12,377

Trade Creditors Turnover Ratio for Vodafone 31 March 2002 31 March 2001 3,335 13,446 ÷ 365 1,899 8,702 ÷ 365 53.28 days 46.20 days

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Financial Ratio Analysis - Activity 17 : Vodafone creditors' turnover ratio answer

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Financial Ratio Analysis - Additional question 16 solution

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Additional question 16 solution
Sage 2001 Total Asset Turnover Stock Turnover Debtors' Turnover 0.47 2000 0.56 One Saturday 2001 12.03 2000 3.62 The Hilton Group 2001 0.82 2000 0.84 Paddy Power plc 2000 0.05 1999 0.47 Fox Kids Europe 2001 0.44 2000 0.37

16.61 71.81

21.10 75.60

0.00 20.64

1.46 34.60

2.40

2.61

0.00

0.00

0.00

0.00

35.15 32.73

390.19 199.91 153.71 124.21 n/a 829.56 497.32

Creditors' 996.33 933.80 320.20 213.42 101.29 92.55 6198.90 Turnover

As we would expect when we put together sets of ratios from a wide range of industries, we can see a wide range of ratio values. With the exception of One Saturday, (a dating agency,) asset turnover is poor for all businesses. Stock turnover rates for three of the businesses are zero. Can you say why this should be the case? Debtors' turnover and creditors' turnover ratios are all very high ... what else should we do to find the true values for these two sets of ratios? Well, we ought to know the answers to all of these questions now; and we have worked through this exercise to try to encourage you to realise that to get to the full truth, we need to look at accounting data very carefully and critically. Secondly, we really need to appreciate that different businesses and different industries all behave in different ways: the table above helps to prove that. Back to Additional question 16. Go to Additional question 17 Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Additional question 17 solution

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Additional question 17 solution
Even though Paddy Power's data are in Euro, we can still calculate their financial ratios: here are the basic ratios we have discussed so far. Paddy Power plc Profitability Gross profit margin Operating profit margin Net profit margin Retained profit margin Rate of Return Return on Capital Employed Return on Total Assets Liquidity Current ratio Acid Test (Liquid) Ratio Asset Usage Total Asset Turnover Stock Turnover Debtors' Turnover Creditors' Turnover 5.08% 0.00 390.19 6198.90 47.17% n/a 199.91 n/a 7.7 7.7 1.3 1.3 -23.83% -269.22% -24.79% -134.52% 2000 87.42% 1999 100.00%

-482.58% -285.20% -488.22% -285.20% -404.55% -289.14%

The first point must be that Paddy Power plc is hardly very profitable is it? Apart from gross profit, Paddy Power plc has only recorded losses - big losses, too, as the ratios clearly demonstrate. A possible reason for such a poor performance in 2000 probably that it has undergone a period of rapid growth. Take a look at its balance sheet and you will see that it has grown from £653,000 to £40,335,000. At the same time turnover has increased from £605,000 to £2,376,000 whereas operating expenses have gone through the roof, so to speak! We assume the Paddy Power has major redevelopment plans as it still has much of the cash it raised in a share issue in 2000: in cash and investments.

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Financial Ratio Analysis - Additional question 17 solution

Paddy Power's rates of return ratios were a disaster in 1999 and whilst they aren't perfect yet, they are improving. Because of the share issue and not having spent that cash yet, the current and acid test ratios are huge for 2000. Notice they are the same since the business does not have any stocks. This cash and investment mountain has had its impact on total asset turnover too as that has dived from 48% to 5% from 1999 to 2000. Stock turnover is zero as they have no stocks and we would need more information concerning debtors and creditors to justify the massive payments periods we have found. We don't have this additional information but clearly the figures quoted in the balance sheet are not the trade debtors and creditors' figures. Taking the five year, horizontal, data into account now we can get a better idea of how Paddy Power plc has come to be in the position it is now it. It is clear from the profitability ratios that we calculated, see the table below, that from 1999 onwards, Paddy Power plc has been going through a period of adjustment, as until then it seemed to be in control of its profitability at least. The graph we have drawn for Paddy Power plc confirms this overall view of its profitability. Net asset turnover, on the other hand, whilst as volatile as profitability, has maintained a good level. This is also shown on the graph below. Paddy Power plc Profitability and Net Asset Turnover Ratios operating profit margin profit before tax margin profit after tax margin Net asset turnover 2001 2000 1999 1998 1997

1.85% 2.93% 2.61% 2.88% 2.89% 1.97% 3.02% 2.62% 2.89% 2.92% 1.59% 2.21% 1.84% 1.85% 1.76% 15.00 13.91 16.64 13.70 14.51

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Financial Ratio Analysis - Additional question 17 solution

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Financial Ratio Analysis - Additional question 18 solution

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Additional question 18 solution
The Jarvis Porter Group is a printing and manufacturing business and the following table contains the basic ratios under the headings given in the question. Jarvis Porter Group Profitability Gross profit margin Operating profit margin Net profit margin Retained profit margin Gross Profit mark up Rate of Return Return on Capital Employed -16.04% -98.28% Return on Total Assets Liquidity Current ratio Acid Test (Liquid) Ratio Asset Usage Total Asset Turnover Stock Turnover Debtors' Turnover Creditors' Turnover 1.55 48.30 72.72 91.60 1.86 49.77 53.62 88.90 1.7 1.1 1.7 1.1 -11.18% -40.45% 13.72% -7.23% -7.23% -6.17% 15.90% 22.23% -23.51% -21.80% -55.00% 28.58% 2001 2000

Along with several businesses in the database, the Jarvis Porter Group has been going through a period of change and possibly difficulty. Although its profitability ratios are largely negative, they have improved over the two year period. The five year summary data confirm the turmoil that this business has been going through; although generally, the group has been growing and improving its profit before tax margin and its rate of return. In place of asset turnover we have shareholders' funds turnover and that is a little

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Financial Ratio Analysis - Additional question 18 solution

volatile suggesting uncertain overall management of the business, or a volatile time for the economy and the sector in which they operate. Otherwise, the working capital and asset usage ratios all seem to bode well for the group except that we have the usual problem with debtors and creditors' turnover ratios probably being in need of revision if we had the additional data to work with. Ratios Profit before tax margin ROCE Shareholders' funds turnover Earnings/(loss) per share (pence) Adjusted earnings/(loss) per share (pence) Equity dividends (pence) 1997 1998 1999 2000 2001

13.00% 13.83% 4.70%

-0.18% -7.15%

44.29% 53.23% 21.28% -0.75% -18.61% 3.41 14.6 17.7 3.85 20 20 4.53 -5.4 5.3 4.07 -54.9 -3.4 2.60 -7.7 -7.7

7.35

7.8

3.75

70

0

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Financial Ratio Analysis - Activity 18 : Vodafone gearing answer

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Activity 18 : Vodafone gearing answer
Vodafone 31 March 2002 31 March 2001 £m Creditors: Amounts falling due after more than one year Equity shareholders' funds 13,118 130,573 £m 11,235 145,007

Gearing Ratio for Vodafone 31 March 2002 13,118: 130,573 0.100: 1 31 March 2001 11,235: 145,007 0.077: 1 As with the Carphone Warehouse, Vodafone's results clearly demonstrate that equity funding is the preferred source of finance for mobile telecommunications businesses with little danger of any threat from long term liability holders. Here are some other Gearing 1 ratios to consider: Leisure International Manufacturer Retailer Discount Refining Pizza Accounting & Airline Airline Restaurants Software Hotels Gearing 1 51.08% 325.37% 0.78% 16.10% 164.82% 25.35% 79.39% 17.27%

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Financial Ratio Analysis - Additional question

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Additional question
Since you might choose any one of the many businesses in the database it is not possible to anticipate every answer. Here are a few, however, in case you have worked on these: Gearing Debt: Equity Next plc BP Amoco Paddy Power plc Clyde Marine Probus Estates Latest year Previous year 0.037 0.207 0.026 0.461 0.147 0.037 0.254 0.000 0.705 0.467

Take a look at each of these businesses in the database, look at their products or services and see whether you feel their gearing ratio is in line with what you would expect of that product or service. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Additional question 20 answer

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Additional question 20 answer
This is an open-ended question for which it's impossible to anticipate all answers. Check your results carefully and if you find a mistake, please check it carefully and correct it as best you can. Read the relevant bit of work again if necessary. Now try additional question 21. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 21 answer

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Additional question 21 answer
This is an open-ended question for which it's impossible to anticipate all answers. Check your results carefully and if you find a mistake, please check it carefully and correct it as best you can. Read the relevant bit of work again if necessary. Now try additional question 22. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 22 answer

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Additional question 22 answer
This is an open-ended question for which it's impossible to anticipate all answers. Check your results carefully and if you find a mistake, please check it carefully and correct it as best you can. Read the relevant bit of work again if necessary. Now try additional question 23. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 23 answer

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Additional question 23 answer
This is an open-ended question for which it's impossible to anticipate all answers. Check your results carefully and if you find a mistake, please check it carefully and correct it as best you can. Read the relevant bit of work again if necessary. Please note that whilst we may have used them before, or not, this question specifically asks you for statistical and graphical analysis. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Earnings per share - answer

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Earnings per share: EPS - answer
31 March 2001 25 March 2000 EPS 38,159,000 £0.046 16,327,000 £0.027 833,000,000 600,000,000 Back to Earnings per share. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 19 : Vodafone EPS answer

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Activity 19 : Vodafone EPS answer
Vodafone Consolidated Profit and Loss Account Profit for the financial period (£) Weighted average number of issued shares 31 Mar 2002 31 Mar 2001

-16,155,000,000 -9,885,000,000 65,012,501,146 61,334,032,162

31 Mar 2002

31 Mar 2001

EPS -16,155,000,000 £-0.25 -9,885,000,000 £-0.16 65,012,501,146 61,334,032,162 Back to Activity 19 : Vodafone EPS. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Advanced note on EPS

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Advanced note on EPS
Look at the following extracts from the annual report and accounts of the Carphone Warehouse and Vodafone. From the Carphone Warehouse's annual report and accounts: Financial highlights Earnings per share 5.4p for 2001 and 3.8p for 200 Note that these EPS values don't agree with our calculations because the profit figure they use is profit before exceptional items and amortisation. They have adjusted their EPS figures for highlighting purposes. On page 13 of their report, the Carphone Warehouse does say: The Group's basic EPS rose by 85% from 2.7p to 5.0p. EPS before amortisation of goodwill and exceptional items rose by 42% from 3.8p to 5.4p per share. So, figures we can agree with and the adjusted figure shown for special purposes. Contrast this with Vodafone. From page 3 of the Vodafone report, here is a graph that Vodafone presents that shows its EPS to be positive for each of the last five years, including 2001 and 2002.

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Financial Ratio Analysis - Advanced note on EPS

Are our calculations wrong, then? No, here is why: From page 27 of their report: ... Adjusted basic earnings per share is calculated after adjusting for goodwill amortisation and exceptional items. It is not a recognised measure under US GAAP but is presented under UK GAAP in order to highlight underlying performance. Vodafone is showing us the adjusted EPS in order to highlight the underlying performance! This can be dangerous if we believe that the real EPS is as shown in their diagram. On page 37 of their report, though, Vodafone does admit: Basic loss per share, after goodwill and exceptional items, increased from a loss of 16.09p for the year ended 31 March 2001 to a loss per share of 23.77p for the year ended 31 March 2002. The loss per share of 23.77p includes an increase in the charge for the amortisation of goodwill from 19.32p per share, for the year ended 31 March 2001, to a charge of 19.82p per share for the year. Back to Vodafone EPS Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Dividends per Share: DPS answer

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Dividends per Share: DPS answer
Vodafone Consolidated Profit and Loss Account Equity dividends (£) Weighted average number of issued shares 31 Mar 2002 31 Mar 2001

1,025,000,000

887,000,000

65,012,501,146 61,334,032,162

31 Mar 2002

31 Mar 2001

DPS 1,025,000,000 £0.0158 887,000,000 £0.0145 65,012,501,146 61,334,032,162 Back to Dividends per Share. Section Index | Previous | Next | Next Section | Section Map © 1996-2006 Biz/ed | Contact Us | About Us | Accessibility Statement | Sitemap | Help

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Financial Ratio Analysis - Dividend Yield answer

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Dividend Yield answer
Vodafone dividend yield Latest annual dividend pence 1.4721 yield 1.63%

Current market share price 90.5 Note: the current market share price was taken from the extract from The Times newspaper and relates to the share price at the close of business on 17 September 2002. Back to Dividend Yield. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 21 : Vodafone Dividend Yield answer

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Activity 21 : Vodafone Dividend Yield answer
Vodafone dividend yield Latest annual dividend Current market share price Source: Yahoo Vodafone dividend yield Latest annual dividend Current market share price Source: Reuters Note: both sets of prices are as at mid morning on 20 September 2002 and are taken from the sources indicated and since I took the prices within 10 minutes of each other, there has been no change to the price hence the yield is the same for each source! These prices will change over time so your answers will probably be different to the results you see here. Back to Activity 21 : Vodafone Dividend Yield. Section Index | Previous | Next | Next Section | Section Map pence 1.4721 88.5 yield 1.66% pence 1.4721 88.5 yield 1.66%

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Financial Ratio Analysis - Dividend Cover answer

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Dividend Cover answer
Consolidated profit and loss account 31 Mar 2002 31 Mar 2001 for the year ended £m Profit for the financial period Dividends -16,155 -1,025 £m -9,885 -887

Vodafone dividend cover

31 Mar 2002 15.76

31 Mar 2001 -9,885 -887 11.14

Profit for the financial period -16,155 Dividends Back to Dividend Cover? -1,025

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Financial Ratio Analysis - Activity 23 : Vodafone P/E ratio answer

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Activity 23 : Vodafone P/E ratio answer
Vodafone Current market share price EPS pence P/E ratio 90.5 3.54 25.56

Back to Activity 23 : Vodafone P/E ratio Additional notes are available on advanced investor ratios. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Interest cover answer

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Interest cover answer
31 March 2001 Profit before interest and taxation Net interest receivable (payable) 45,012 18.87 2,385 -196 25 March 2000 25,300 -129.08

Note: a positive value here means that the Carphone Warehouse is a net interest earner. Back to Interest cover? Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Activity 24 : Vodafone Interest cover answer

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Activity 24 : Vodafone Interest cover answer
Vodafone 31 Mar 2002 31 Mar 2001 Consolidated profit and loss account £m Profit before interest and taxation Net interest receivable (payable) -12,694 -845 £m -6,909 -1177

31 Mar 2002 Profit before interest and taxation -12,694 Net interest receivable (payable) -845 15.02

31 Mar 2001 -6,909 -1177 5.87

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Financial Ratio Analysis - Additional question 24 answer

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Additional question 24 answer
This is an open-ended question for which it's impossible to anticipate all answers. Check your results carefully and if you find a mistake, please check it carefully and correct it as best you can. Read the relevant bit of work again if necessary. Please note that whilst we may have used them before, or not, this question specifically asks you for statistical and graphical analysis. Back to Additional question 24. Section Index | Previous | Next | Next Section | Section Map

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Financial Ratio Analysis - Additional question 25 answer

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Additional question 25 answer
This question is often best answered in a group of two or three people. Here are the answers anyway: Company 1 2 3 4 5 6 7 8 Retailer Established International Airline Leisure and Hotels New Discount Airline Oil Extraction and Refining Accounting Software Developer and Supplier Scientific Research Manufacturer Industry

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Financial Ratio Analysis - Additional question 26 answer

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Additional question 26 answer
Here are many of the ratios to choose from when answering this question and a basic meaning, or brief description, of each group of ratios. Ratio Name Basic Meaning Profitability Gross Profit Margin Operating Profit Margin Profit Before Interest and Taxation Margin Retained Profit Margin Rate of Return Ratios Return on Capital Employed Return on Total Assets Liquidity Current Ratio Acid Test Ratio Liquidity ratios give us an idea of how well the business is able to pay all of its bills over the short term Activity Total Asset Turnover Ratio Fixed Asset Turnover Ratio Stock Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio When we ask a businessman how well he has used the assets in his business, these are the ratios he would calculate in order to answer our question. There are many of these ratios and each one tells us a little bit about the business's efficiency in using its assets Gearing Debt: Equity Debt: Debt + Equity Back to Additional question 26. The gearing ratios tell us whether the shareholders are really in control of their own business or whether then banks or debenture holders might be. Rates of return ratios show us how profitability of a business relates to the capital and assets employed, or used, by the business. Profitability ratios are all percentages and they tell us how much profit we have made per £1 of turnover. There are many different profitability ratios and here are just a few of them.

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Financial Ratio Analysis - Additional question 26 answer

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Financial Ratio Analysis - Which ratios will each of these groups be interested in?

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Which ratios will each of these groups be interested in? - answer
Interest Group Investors Ratios to watch Return on Capital Employed Earnings per Share Dividends per Share Dividend Yield Interest Cover Liquidity P/E Ratio Gearing ratios Interest cover Dividend payout ratio Dividend Cover Dividend Yield Profitability ratios Asset turnover ratios Stock, debtors and creditors turnover ratios Liquidity ratios Investor ratios Return on Capital Employed Profitability Cash flow figures Investor ratios

Lenders

Managers

Employees

Suppliers and other trade creditors Profitability Liquidity Creditors' turnover Working capital management Customers Profitability Liquidity Return on Capital Employed Profitability Liquidity Return on Capital Employed

Governments and their agencies

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Financial Ratio Analysis - Which ratios will each of these groups be interested in?

Local community Financial analysts Environmental groups

This could be a long and interesting list The majority of all ratios Expenditure on anti pollution schemes Expenditure on animal based research Donations to charities and political organisations Depends on the purpose of their study

Researchers

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